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This  book  is  DUE  on  last  date  stamped  below 


SOUTHERN    BRAi 

UNIVERSITY  of  CALIFORNIA 
LIBRARY 

LOS   ANGELES,  CALIF. 


MANUFACTURING 
COSTS  AND  ACCOUNTS 


\Mq  Qraw-Jj ill  Book  (h  Ine. 

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MANUFACTURING 

COSTS  AND  ACCOUNTS 


BY 
A.  HAMILTON  CHURCH 

AUTHOR    OF   "THE    PROPER   DISTRIBUTION    OP   THE    EXPENSI 

BURDEN,"  "PRODUCTION  FACTORS,"  "THE  SCIENCE 

AND   PRACTICE   OF    MANAGEMENT,"    ETC. 


First  Edition 
Seventh  Impression 


McGRAW-HILL  BOOK  COMPANY,  Inc. 

NEW  YORK:    239   WEST  39TH  STREET 

LONDON:    6  &  8  BOUVERIE  ST.,  E.  C.  4 

1917 

40055 


Copyright,  1917,  by  the 
McGraw-Hill  Book  Company,  Inc. 


r   II    H        M    A     !•    I.    K       PI  X  0  fl       T    <>   H    K       PA 


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PREFACE 

While   many  excellent   treatises   exist   on   Cost   Accounting, 
there  is  none,  as  far  as  I  know,  that  can  be  placed  in  the  hands 
of  a  student  for  the  purpose  of  gradually  introducing  him  to  the 
underlying  principles  on  which  manufacturing  accounting  of  all 
kinds  must  rest. 
st     The  subject  is  so  vast,  and  the  side  issues  so  numerous  that  to 
£}  compile  a  treatise  that  shall  not  be,  on  the  one  hand,  quite  un- 
^  wieldly,  or  on  the  other,  quite  inadequate,  is  a  very  difficult 
ifltask.     The  temptation  to  elaborate  minor  points  is  constantly 
J  present,  and  in  doing  so  the  main  thread  of  the  subject  is  apt  to 
if  be  interrupted.     It  has  seemed  more  important  to  present  a  com- 
**  paratively  simple  view  of  the  general  structure  of  cost  accounts 
than  to  attempt  the  detailed  description  of  specific  systems,  on 
*  which  in  fact  many  adequate  volumes  are  already  in  existence. 
V      At  the  same  time,  the  peculiar  position  of  the  cost  accountant 
'  had  to  be  kept  in  mind.     The  cost  man  is  rarely  an  accountant 
^jin  the  full  sense  of  that  word.     He  lives  in  a  world  of  detail, 
and  is  apt  to  undervalue  the  broader  groupings  that  alone  in- 
terest, as  a  rule,  the  general  accountant.     It  has  been  attempted 
tin  the  present  work  to  show  the  cost  accountant  the  relation  of 
\  his  work  to  the  general  accounts.     Further,  the  peculiar  value  of 
\  detail  to  the  technical  arm  has  been  emphasized  with  a  view  to 
exhibit  to  the  general  accountant  a  viewpoint  that  he  sometimes 
misses. 

The  aim  of  this  book  is,  therefore,  somewhat  different  from 
that  of  existing  works.  The  why  and  wherefore  of  cost  account- 
ing is  its  peculiar  field,  and  it  is  hoped  that  armed  with  this  fun- 
damental information  the  student  will  have  no  difficulty  in  apply- 
ing his  reading  to  the  particular  problems  he  may  meet. 

The  Author. 


CONTENTS 

Preface v 

PART  I 

GENERAL  OUTLINE  OF  MANUFACTURING  ACCOUNTS 

Chap.  Page 

I.  Purchasing— Production — Marketing 1 

II.  The  Mechanism  of  Accounting 12 

III.  The  Mechanism  of  Cost  Accounting 25 

IV.  Mechanism  for  Connecting  Cost  with  Product 37 

V.  Costing  on  Method  A 44 

VI.  Costing  on  Method  B 56 

VII.  Costing  on  Method  C 66 

VIII.  The  Final  Stage  of  Costs 81 

IX.  Waste  &  Spoilage.     Scrap.     Byproducts 86 

X.  Auxiliary  Equipment — Designs,  Patterns,  Molds,  Jigs,  etc.  .    .  96 

XL  Sales  and  Selling  Expense 100 

XII.  Summarizing  the  Results  of  a  Business  Period 109 

XIII.  Recapitulation 118 

PART  II 
COST  ACCOUNTING 

I.  The  General  Diagram 123 

II.  Purchase  Orders 132 

III.  Recording  Purchase  Expenditures 146 

IV.  Purchases  not  Immediately  Chargeable — Stores 156 

V.  Stores  (Continued) 167 

VI.  Stores  (Continued) — Continuous  Inventory 183 

VII.  Purchases  not  Immediately  Chargeable—  Buildings  and  Plant.    191 

VIII.  Rents,  Taxes,  Insurance,  etc 207 

IX.  Time  and  Pay 216 

X.  Works  Expense,  and  Administrative  Expense 234 

XL  General  View  of  the  Foregoing  Operations 237 

XII.  Orders — Service  or  Standing  Orders 242 

XIII.  Orders— Production  Orders 255 

XIV.  Cost  Sheets  and  Burden 272 

XV.  Costing 279 

XVI.  Departments 284 

XVII.  Costing  on  Method  A  (Department  Hour-cost  Method)  ...  287 

XVIII.  Costing  on  Method  B  (Hourly  Burden  or  Percentage  Plan) .    .  312 

XIX.  Costing  on  Method  C  (Scientific  Machine  Rate  Plan)  ....  340 

XX.  Costing  on  Method  C  (Determining  the  Machine  Rate)   .    .    .  355 

vii 


vm  CONTENTS 

Chap.  Page 

XXI.  Costing  on  Method  C  (Control  of  Factors) 371 

XXII.   Collecting  Departmental  Costs 377 

XXIII.  Final  Remarks  on  Costing 387 

XXIV.  The  Inclusion  of  Interest  in  Cost 392 

PART  III 
FACTORY  REPORTS  AND  RETURNS 

I.  The  Nature  of  Reports  and  Returns 397 

II.   Reports  and  Returns  for  the  Foreman  .    .    . 405 

III.  Reports  and  Returns  for  the  Superintendent 418 

IV.  Reports  and  Returns  for  the  Executive 434 


MANUFACTURING  COSTS 
AND  ACCOUNTS 


PART  I 


GENERAL  OUTLINE  OF  MANUFACTURING 
ACCOUNTS 


CHAPTER  I 
PURCHASING— PRODUCTION— MARKETING 

Manufacturing  is  the  art  of  making  changes  in  the  condition 
of  material  by  the  application  of  labor  and  machinery.  These 
changes  may  affect  either  the  form,  the  substance  or  composition, 
or  the  dimension  of  the  material  operated  on,  or  all  these  together. 
To  begin  with  we  must  always  have  material  in  some  shape  or 
other.  Often  we  require  more  than  one  kind  of  material. 
Alteration  in  the  status  or  condition  of  material  is  the  essential 
fact  in  manufacturing,  and  cost  accounting  has  for  its  aim  the 
ascertaining  of  the  cost  of  these  alterations.  All  expenditure 
within  the  factory  that  does  not  contribute  in  some  way  to  the 
alteration  of  the  status  or  condition  of  material  is  wasted  expendi- 
ture. The  more  advanced  methods  of  accounting  are  able  to 
distinguish  between  expenditure  that  is  wasted  in  this  way,  and 
expenditure  that  has  actually  and  usefully  contributed  to  pro- 
ductive processes. 

The  different  kinds  of  changes  in  material  usually  met  with  are 
the  following: 

1.  The  material  remains  unchanged  in  substance,  nothing 
being  added  to  or  taken  away  from  it,  except  possibly  waste 
particles.  The  original  material  is  only  changed  in  form  or 
dimension. 

2.  It  may  be  split  up  as  it  proceeds,  and  various  byproducts 
taken  from  it. 

1 


MAN  I  ~!\\<  TURING  COSTS  AND  ACCOUNTS 

3.  It  may  be  added  to  as  it  proceeds,  and  combined  with  new 
material  or  other  forms  of  the  same  material. 

In  tracing  the  cost  of  changes  in  material,  the  accounting  will 
obviously  be  complex  or  simple,  according  to  the  amount  of 
detail  that  we  wish  to  record.  If,  for  example,  we  only  wish  to 
ascertain  the  cost  of  the  whole  series  of  changes,  disregarding  the 
cost  of  each  intermediate  stage,  it  will  be  fairly  simple.  But 
in  proportion  as  we  begin  to  look  for  the  cost  of  the  intermediate 
changes,  it  will  become  complex.  The  final  stage  of  complexity 
■  lied  when  we  require  to  find  the  cost  of  every  change,  how- 
ever slight,  in  the  status  of  every  piece  of  material  that  goes  into 
the  product.  This  ultimate  development  is  represented  in  many 
varieties  of  engineering  cost  accounts. 

It  was  pointed  out  above  that  these  changes  in  the  status  of 
materia]  were  wrought  by  the  application  of  labor  and  of 
machinery.  Included  in  the  term  "labor"  is  every  kind  of 
human  activity,  both  mental  and  manual.  Skill  and  experience 
are,  of  course,  as  much  part  of  the  cause  of  the  changes  in  material 
as  the  actual  physical  labor  of  operating  machines  or  handling 
product. 

Before  we  commence  a  manufacturing  business  we  have  noth- 
ing but  cash,  or  a  bank  balance  which  is  the  equivalent  of  cash. 
Our  first  act  in  setting  up  an  industry  is,  therefore,  purchase, 
and  by  purchase  we  acquire: 

1.  Buildings,  machinery  and  equipment. 

2.  The  services  of  officials,  managers,  operatives  and  laborers. 
Outside  cooperation,  such  as  insurance,   rent  of  land  or 

premises,  taxes,  professional  service,  etc. 
■1.  Material. 

Having   acquired   these  things  and  services,  we  proceed  to 

organize  them  in  such  a  way  thai  material  is  continually  changing 

la  or  condition — continually  progressing  from  the   raw 

to  the  finished  stage.     Having  arrived  at  the  finished  stage, 

U|-  h  tead  of  the  original  raw  material,  something  quite 

milar  in   either  form,  Bubstance  or  dimension.     This  new 

thing  i-  our  salable  product.     Commonly  also,  we  have  certain 

ich  a-  spoiled  or  discarded  material  which  may  or  may 

not  have  a  market  value,  and  we  may  also  have  expended  money 

not  used.     The  latter  have  no  value  at  all. 

I      in    an    accounting    viewpoint,    therefore,    manufacturing 

■nine  divisions,  viz.: 


PURCHASING— PRODUCTION— MARKETING         3 

Expenditure  on  purchases — equipment,  labor,  material,  service. 

Transformation  of  material  into  salable  product. 

Marketing  salable  product. 

These  prime  divisions  must  be  preserved  in  all  manufacturing 
accounting  schemes.  In  practical  language  they  are  briefly 
classified  as: 

P  URCHASING-PROD  UCTION— SALES 

I.  PURCHASING 

In  considering  purchases  and  their  relation  to  costs,  we  come 
at  once  to  a  division  of  great  practical  importance.  Purchases 
may  be  divided  into  three  main  classes: 

1.  Those  of  which  the  value  depends  on  their  being  used  at 
once,  and  become  a  dead  loss  if  not  so  used. 

2.  Those  which  can  be  stored  for  a  reasonable  time  without 
deterioration,  and  can  be  taken  out  of  stores  and  used  at  any 
moment  they  are  wanted. 

3.  Those  of  which  the  value  slowly  diminishes,  more  quickly 
if  they  are  used,  less  quickly  if  they  are  not  used. 

In  the  first  class  all  labor  must  be  included.  Unless  there 
is  employment  for  a  man,  any  wages  he  is  paid  are  a  dead  loss. 
Labor  cannot  be  stored  in  the  slightest  degree.  Rent  and  taxes 
are  in  the  same  class.  Rent  of  an  office  that  is  not  being  used  is 
obviously  an  irrecoverable  loss.  Every  kind  of  purchase  of  which 
the  value  is  measured  by  time,  must  necessarily  be  put  to  use 
before  the  time  paid  for  has  elapsed,  or  the  payment  has  no  eco- 
nomic value  at  all. 

In  the  second  class  belong  all  ordinary  raw  materials.  Most 
material  is  capable  of  reasonable  storage.  If  it  deteriorates  it 
then  becomes  waste,  in  proportion  to  the  amount  of  deteriora- 
tion.    It  does  not  pass  to  any  other  class. 

The  third  class  is  a  most  important  one,  embracing  as  it  does, 
nearly  all  capital  investment — buildings,  machinery,  equipment, 
tools.  The  value  of  any  of  these  does  not  depend  on  immediate 
use,  as  does  that  of  labor.  The  value  of  a  building,  or  a  lathe  or 
a  crane  does  not  vanish  within  a  week  or  a  month  if  unused. 
But  on  the  other  hand,  from  the  moment  of  erection  in  the  shop, 
a  lathe  or  crane  begins  to  lose  value,  even  though  it  is  not  being 
called  on  to  do  work. 

This  classification  is  a  rough  one,  though  useful  to  remember. 


4         MANUFAi  TURING  COSTS  AND  ACCOUNTS 

The  division  between  2  and  3  is  somewhat  arbitrary  when  the 
smaller  articles  are  in  question,  and  is  based  on  practical  con- 
siderations chiefly.  Theoretically  many  kinds  of  material  would 
deteriorate  if  stored  for  a  number  of  years,  but  practically  this 
never  happens  in  a  well-managed  plant.  If  material  is  subject  to 
deterioration  then,  of  course,  it  would  not  usually  be  purchased 
save  in  such  quantities  as  were  wanted  for  immediate  use.  For 
all  practical  purposes,  therefore,  we  may  say  that  material  likely 
to  be  found  in  the  stores  of  a  well-managed  plant  is  not  subject 
in  deterioration. 

Small  tools,  such  as  files,  occupy  the  border  line  between 
Classes  2  and  3.  As  long  as  they  are  in  the  stores,  properly 
jtacked  and  cared  for,  they  cannot  be  regarded  as  subject  to 
deterioration.  As  soon,  however,  as  they  are  issued  to  the  shops 
they  pass  to  the  third  class,  and  become  subject  to  a  quickly 
diminishing  value. 

This  brings  us  face  to  face  with  an  important  feature  of  the 
third  -lass  of  purchase.  All  such  items  do  not  diminish  in  value 
at  the  same  rate.  As  soon  as  a  file  is  put  into  use,  it  diminishes  in 
value  in  a  visible  and  obvious  way.  But  a  solid  stone  or  steel 
and  concrete  building  has  a  much  more  extended  career  of  use- 
fulness. A  file  may  last  a  few  days  in  regular  use;  a  good  building 
may  still  be  serviceable  in  50  or  even  100  years  under  favorable 
circumstances. 

Between  these  extreme  limits  practical  experience  has  dis- 
covered ;1  whole  range  of  differences  in  the  useful  life  of  equipment. 
This  slowly  diminishing  value  of  capital  investment  in  industrial 
buildings,  equipment  and  tools  is  called  "depreciation,"  and  is 
an  important  element  in  cost  as  will  be  seen  later  (see  Chap.  III). 
Briefly,  however,  we  may  say  that  each  class  of  purchase  in  Class 
3  ha-  ita  own  rate  of  diminishing  value,  or  depreciation,  and 
this  is  the  basis  on  which  the  original  purchase  price  is  charged  to 

I  rom  the  foregoing  it  will  be  seen  that  purchase  is  an  initial 

transaction,  wholly  separate  from  costing.     To  keep  an  account 

of   purchases,    however   accurately,    throws   no  light   on   cost. 

Thia  i-  because  all  purchases  do  not  pass  at  once  into  manufactur- 

Dperations,  but  are,  as  it  were,  held  up  for  longer  or  shorter 

period-,  before  they  are  made  use  of.     Referring  again  to  the 

of  purchases  mentioned  above,  we  find  that: 

Purchases  in  <  lass  1  must  be  immediately  transferred  to  cost 


PURCHASING— PRODUCTION— MARKETING         5 

(which,  by  the  way,  may  be  either  manufacturing  or  selling  cost) 
because  they  can  under  no  circumstances  be  stored. 

Purchases  in  Class  2  are  not  necessarily,  nor  usually,  trans- 
ferred to  cost  at  once.  They  consist  of  materials  which  may  be 
purchased  today  for  use  a  week  or  a  month  hence,  or  longer. 
Their  purchase  price  must  be  charged  to  cost  only  when  they  are 
actually  used,  and  not  before. 

Purchases  in  Class  3,  consisting  of  buildings,  equipment, 
machinery  and  tools,  are  of  such  a  nature  that  they  are  slowly 
used  up  only  in  the  processes  of  manufacture.  But  as  they  are 
used  up  in  the  end  (and  also  tend  to  get  out  of  date,  and  become  of 
diminished  value  on  that  account)  it  is  evident  that  their  pur- 
chase price  must  be  charged  to  cost  on  some  reasonable  basis 
which  takes  into  account  this  peculiarity  of  slow  consumption. 
This  is  usually  effected  by  a  depreciation  charge  based  on  their 
expected  life.  Thus  if  a  machine  is  expected  to  last  20  years  or 
say  1,000  weeks,  then  Hooo  °f  its  purchase  price  may  be 
charged  to  cost  every  week. 

Another  plan  is  to  connect  the  life  of  the  item  with  the  quantity 
of  product  it  is  expected  to  handle  before  it  is  worn  out.  Thus, 
if  a  melting  furnace  costs  $1,200  and  experience  has  shown  that 
it  will  melt  600  tons  of  metal  before  it  is  worn  out,  then  3^500 
of  the  purchase  price  is  added  to  the  cost  of  every  ton  melted. 
The  choice  of  one  of  these  methods  will  depend  on  circumstances 
that  cannot  be  discussed  here.  The  main  point  to  observe  now 
is  that  the  purchase  price  of  items  in  Class  3  is  transferred  to  cost 
little  by  little,  the  rate  of  transfer  depending  on  the  class  of  item, 
and  the  experience  of  practical  men  as  to  its  probable  life. 

II.  PRODUCTION 

In  every  working  period,  say  for  convenience,  a  month,  there 
will  be  (if  the  foregoing  classification  is  observed)  a  transfer  of 
purchases  to  production  and  selling  made  up  of  the  following 
principal  items: 

Wages  and  salaries  paid  during  the  month. 

Rents,  taxes,  insurance  and  other  "outside"  items. 

Materials  actually  used  during  month. 

Reasonable  charges  for  building,  equipment,  etc.  Deprecia- 
tion. 

When  these  items  are  added  together  they  represent  the  total 


6  MANUFACTURING  COSTS  AND  ACCOUNTS 

cost  of  production  and  selling  for  the  month.  If  now  the 
product  is  of  such  a  character  thai  the  same  amount  of  work  in 
process  (i.e.,  work  begun  but  not  finished)  is  in  the  shop  at  all 
times,  or  if  it  is  of  such  a  nature  that  each  month's  work  can  be 
cleared  up,  leaving  nothing  in  an  incomplete  condition  and  if 
each  month's  output  is  sold  during  the  month,  then  we  have  here 
all  that  the  commercial  accountant  requires  to  know  about  cost. 
For  he  will  be  able  to  put  these  elements  of  cost  on  one  side, 
and  selling  price  on  the  other,  the  difference  between  being  profit 
for  the  month.     Thus: 


Wages  and  salaries,  rents, 

taxes,  etc. 
Materials  used. 
Depreciation. 
Balance:  Profit. 


Hale  price  of  product. 


Fig.    1.   -Statement  of  cost,  sale  price  and  profit. 

Note. — The  items  on  the  left  of  the  statement  will  include  expenditure  on 
production  and  also  on  selling. 

But  aii  account  of  this  kind,  even  though  it  accurately  records 
the  facts  about  what  is  a  very  simple  transaction,  is  not  yet  a 
cost  account  in  the  proper  sense.  The  cost  accountant  is  con- 
cerned not  with  the  profits  of  the  business,  but  with  the  result  of 
expenditure  on  production.  The  above  statement  does  not 
distinguish  between  cost  of  making  and  cost  of  selling.  If  there 
is  more  than  one  kind  of  product  it  throws  no  light  on  which  is  the 
mosl  profitable  to  manufacture  or  the  easiest  to  sell.  It  is  merely 
a  commercial  result,  true  as  far  as  it  goes,  but  not  going  very  far. 

At  the  very  leasl  the  cost  accountant  will  desire  to  distinguish 
between  the  cost  of  making  and  the  cost  of  selling.  He  will 
wanl  to  know  the  cosl  of  making  product  A  separately  from  the 
cosl  of  making  producl  I!,  lie  may  desire  to  know  much  more 
than  this.  He  may  wish  to  ascertain  jusl  in  what  way  the  money 
hae  been  expended  in  the  making  of  the  product,  how  much  on 
this  process  and  how  much  on  that.  He  may  desire  to  ascertain 
the  value  of  and  the  reasons  for  waste.  All  these  things  are 
problems  of  cosl  accounting,  and  their  use  is  found  not  in  ascer- 
taining broad  commercial  results,  but  in  throwing  light  on 
manufacturing   details,   and    providing  the  technical  men  with 


PURCHASING— PROD  UCTION— MARKETING         7 

data  by  which  they  can  study  how  to  reduce  cost  and  increase 
output. 

The  first  step  toward  cost  accounting  is  to  separate  the  expen- 
diture on  production  from  that  on  selling. 

Having  isolated  cost  of  production,  the  next  step  is  to  look 
about  for  some  means  of  connecting  the  transferred  purchase 
figures  thus  isolated  with  the  quantity  of  salable  product  produced 
in  the  month.  This  may  be  quite  easy  or  altogether  impossible 
to  arrive  at  by  any  arithmetical  process.  It  will  be  quite  easy, 
if,  for  example,  some  uniform  product  such  as  one  width,  grade 
and  substance  of  paper  has  been  the  only  thing  produced  in 
the  period.  All  that  is  necessary  in  that  case  is  to  ascertain  the 
number  of  yards  (or,  if  preferred,  pounds)  of  such  product  thai 
has  been  made,  and  to  divide  the  total  yards  or  pounds  into 
the  total  expenditure  on  production.  The  quotient  will  be  the 
cost  per  single  pound  or  yard. 

If,  however,  the  product  is  not  of  a  uniform  character — if, 
for  example,  it  happens  to  have  been  1,000  kettles,  10  tons  of 
flat-irons,  5,000  lb.  of  brass  hooks,  and  3,000  military  shovels — 
then  it  is  impossible  to  obtain  any  arithmetical  relation  between 
the  total  of  cost  of  production,  and  the  output  of  product. 

It  is  true  that  if  all  product  were  to  be  weighed,  and  by  this 
means  an  output  of  say  40  tons  of  product  were  established,  it 
would  be  arithmetically  possible  to  divide  the  total  cost  by  40 
and  so  ascertain  a  cost  per  pound  of  product  as  before.  But  such 
a  figure  would  be  meaningless.  It  would  depend  on  the  ac- 
cidental proportion  of  each  article  on  the  occasion  in  question. 
Exactly  the  same  articles,  making  the  same  total  weight,  but 
mixed  in  different  proportions  of  each,  would,  on  the  next  occa- 
sion of  costing,  give  rise  to  a  wholly  different  cost  figure  per  pound. 
An  attempt  to  ascertain  cost  in  this  way  would,  therefore,  be 
worse  than  useless,  it  would  be  misleading. 

The  cost  accountant  who  had  only  data  as  to  total  expenditure 
on  production  before  him  would  be  utterly  baffled  to  find  the  cost 
of  his  various  products  unless  he  went  into  greater  detail.  If  he 
were  asked  to  state  the  cost  of  a  kettle,  or  of  a  pound  of  brass 
hooks,  he  could  give  no  reply.  Similarly  in  the  case  of  the 
paper  output  just  referred  to,  although  he  could  state  the  cost  per 
pound  of  the  finished  product,  if  he  were  asked  how  much  of  the 
cost  represented  power,  how  much  operative  labor,  and  how  much 
supervision,   he  could  not  reply.     If  it   were   discovered  that 


8         MANUFACTURING  COSTS  AND  ACCOUNTS 

another  mill  were  producing  more  cheaply,  and  even  if  the  details 
of  its  cost  were  known,  he  could  throw  no  light  on  the  question 
"Why  are  our  costs  higher  than  those  of  the  other  mill?"  He 
could  not  tell  whether  they  were  higher  all  round,  or  whether 
some  special  efficiency  in  some  one  direction  was  responsible  for 
the  lower  cost  of  the  other  mill. 

Faced  with  this  problem,  it  is  easily  realized  that  merely  to 
ascertain  the  ingoings  and  outgoings  of  a  factory  or  of  a  shop  is 
not  cost  accounting.  It  is  only  commercial  accounting,  useful 
for  general  bookkeeping,  but  useless  for  any  technical  purpose. 

Another  kind  of  difficulty  might  also  present  itself.  If  the 
nature  of  the  business  were  such  that  the  "work  in  process" 
(i.e.,  work  begun  but  not  finished,  and,  therefore,  lying  in  the  shop 
in  a  half-finished  condition)  fluctuated  considerably,  so  that  it 
might  be  higher  at  the  end  of  one  month  than  at  the  end  of 
another,  then  even  the  broad  result,  shown  in  Fig.  1,  would  fail 
in  accuracy.  For  if  all  that  went  in  did  not  come  out,  or  if  in  a 
subsequent  month,  more  came  out  than  went  in,  and  both  of 
these  cases  would  occur  in  such  a  business,  then  it  is  clear  that 
the  relation  between  cost  and  selling  price  is  no  longer  a  simple 
and  direct  one,  but  that  profit  will  be  affected  by  the  degree  to 
which  unfinished  work  remains  in  the  shop  each  month.  Further, 
it  would  be  impossible  to  arrive  at  a  satisfactory  unit  cost  (per 
pound  or  yard)  of  product,  since  we  can  no  longer  divide  the  cost 
of  what  went  in  by  amount  actually  produced,  because  the  latter 
is  in  all  stages  of  completion,  and  an  indeterminate  quantity  of 
it  was  also  partly  produced  by  expenditure  in  a  previous  month. 

In  practice,  this  difficulty  is  overcome,  where  there  are  no 
proper  cost  accounts,  by  what  is  called  stock-taking.  The  ad- 
vantage of  a  monthly  balance  sheet  must,  of  course,  be  foregone, 
for  Btock-taking  is  too  costly  and  disturbing  an  operation  to  be 
carried  out  frequently.  Every  6  or  12  months  a  list  or  "in- 
ventory" is  taken  of  all  work  in  process,  and  a  value  assigned  to 
the  items  on  a  more  or  less  correct  basis.  The  accountant  is 
Hum  able  to  introduce  the  value  so  ascertained  on  the  right  side 
of  the  statement,  Fig.  1,  so  that  he  has  on  one  side  the  cost  of 
operating  the  business,  and  on  the  other  the  results,  namely, 
sale-  a1  -ale  price,  ami  some;  unfinished  work  at  supposed  cost 
price.  The  balance,  profit,  is  taken  out  as  before.  This  old- 
fashioned  method  of  bookkeeping — it  cannot  be  called  ac- 
counting    ie  si  ill  in  use.     It  is,  of  course,  utterly  out-of-date. 


PURCHASING— PRODUCTION— MARKETING         9 

Cost  accounting  has  taken  its  rise  from  the  necessity  that  exists 
in  modern  business  to  know  more  than  broad  commercial  results. 
The  difference  between  cost  systems  is  not  so  much  due  to  the 
difference  between  industries,  as  in  the  very  varying  degree  in 
which  technical  detail  is  valuable  in  different  industries.  In 
some  industries,  the  product  is  of  so  simple  and  uniform  a  charac- 
ter, and  the  operations  so  unvaried,  that  elaborate  anafysis  of  cost 
would  have  but  small  technical  value.  In  other  cases,  the 
reverse  of  these  conditions  obtains.  In  some  industries  selling 
prices  could  not  be  safely  fixed  without  the  close  observation  of 
cost  as  regards  the  smallest  detail  of  production.  In  others  analy- 
sis of  cost  is  necessary  to  keep  production  up  to  the  high-water 
mark  of  efficiency.  But  in  all  these  instances,  cost  keeping  can 
begin  only  when  the  prime  divisions  of  purchase,  production 
and  selling  or  marketing  have  already  been  made.  Cost  account- 
ing depends  for  its  success  on  the  analysis  and  isolation  of  dis- 
similar items,  and  determination  of  their  exact  relation  to  the 
changes  wrought  in  material. 

III.  MARKETING  THE  PRODUCT 

The  cost  of  a  product  should  be  its  cost  at  the  factory  gate. 
As  soon  as  an  article  is  finished,  and  turned  over  to  the  warehouse 
to  be  stored  there  against  future  sale,  or  to  be  shipped  at  once  to 
a  customer,  the  factory  has  no  part  or  lot  in  its  future.  Produc- 
tion cost  should,  therefore,  be  separated  rigorously  from  the  cost 
of  marketing  the  product. 

The  efficiency  of  manufacturing  and  the  efficiency  of  selling 
have  no  relation  to  one  another.  Efficiency  may  be  high  in 
one  and  low  in  the  other.  Extremely  efficient  manufacturing 
may  be  discounted  by  extravagant  or  inefficient  methods  of 
marketing.  On  the  other  hand,  skilful  marketing  may  offset 
an  unduly  high  cost  or  poor  grade  of  production. 

The  word  " marketing''  has  been  used  here  in  place  of  the  more 
usual  word  selling,  because  in  truth  marketing  is  a  more  compre- 
hensive term.  In  foreign  trade,  especially,  the  selling  of  product 
— making  a  sale — is  by  no  means  the  end  of  the  story.  Market- 
ing includes  (besides  the  act  of  selling,  and  the  publicity,  travel- 
ing and  other  expenditure  leading  up  to  the  sale)  the  important 
questions  of  suitable  and  careful  packing,  shipping,  shepherding 
the  consignment  among  the  pitfals  of  foreign  custom  regulations, 


10        MANUFACTURING  COSTS  AND  ACCOUNTS 

and  arranging  for  payment  on  terms  and  through  channels  which 
in  some  cases  may  be  quite  roundabout.  Marketing  does  not 
end  until  the  money  has  been  received  and  the  customer  known 
to  be  satisfied.  It  thus  includes  what  is  known  as  the  credit 
department  of  businesses. 

None  of  these  expenditures  can  properly  be  charged  against 
production.  It  makes  no  difference  to  the  factory  whether  a  bale 
of  goods,  or  a  consignment  of  product  of  any  kind,  is  consumed 
in  the  home  city,  or  in  Maine  or  Texas  or  Oregon — or  whether  it 
finds  its  way  ultimately  to  the  interior  of  China  or  Brazil.  But 
to  the  marketing  department  it  makes  a  great  deal  of  difference, 
particularly  in  the  amount  of  trouble  and  outlay  involved  in 
completing  the  transaction  after  the  sale  is  made.  This  depart- 
ment should,  therefore,  bear  the  burden  of  its  own  transactions. 

The  subject  of  the  cost  of  marketing  has  received  but  little 
attention,  yet  it  is  a  very  important  one.  Where  a  plant  makes 
several  different  products,  where  it  sells  in  different  markets, 
where  it  has  a  variety  of  means  on  which  it  relies  to  effect  sales, 
where  some  of  its  transactions  involve  constant  watchfulness  to 
prevent  loss  from  bad  debts,  and  other  transactions  are  free  from 
this  drawback — in  all  such  cases  the  importance  of  good  market- 
ing accounts  becomes  pronounced.  Just  as  there  are  many 
factors  which  it  is  necessary  to  analyze  and  take  into  account 
if  we  would  obtain  an  intelligent  idea  as  to  the  way  our  money 
is  being  spent  on  production,  so  in  the  cases  just  enumerated 
there  are  several  factors  that  affect  our  cost  of  marketing  un- 
equally as  regards  portions  of  our  total  sales.  And  just  as  some 
shop  expense  is  found,  on  analysis,  to  be  incurred  by  one  class 
of  product  or  one  order  in  greater  degree  than  another,  so  if 
proper  marketing  accounts  are  kept,  it  will  be  found  that  certain 
expenses  bear  more  heavily  on  one  product  or  one  customer's 
order  than  on  another  product  or  order.  Knowledge  of  these 
musl  obviously  affect  our  selling,  and  in  fact  our  whole 
business  policy. 

If  we  consider  the  marketing  or,  as  it  is  commonly  though 
perhaps  unfortunately  called,  the  selling  department,  as  an 
independent  corporation  (as  is  sometimes  actually  the  case) 
and  if  we  regard  it  as  buying  finished  goods  from  the  factory  at 
mhI  thai  all  its  operations  thereafter  are  just  those 
of  a  wholesale  merchant,  we  shall  have  adopted  the  proper  view  of 
the    true   relations    between    the   selling   department   and   the 


PURCHASING— PRODUCTION— MARKETING       1 1 

factory,  and  the  consequent  sharp  division  to  be  drawn  between 
them  in  setting  up  a  system  of  accounts. 

IV.  DIVISIBLE  EXPENSES 

There  are  certain  expenditures  that  will  occur  to  everyone 
as  having  no  natural  classification  either  as  factory  or  selling 
expense.  Examples  of  such  items  are  the  president's  salary,  the 
upkeep  and  salary  list  and  expenses  of  the  main  office,  etc. 
There  are  usually  a  number  of  such  items. 

The  existence  of  these  items  does  not  affect  the  principle  of 
division  already  laid  down.  They  arise  from  the  fact  that  the 
work  of  such  officials  is  sometimes  devoted  to  matters  relating 
to  purchasing,  sometimes  to  production,  and  sometimes  to 
selling  and  marketing.  Analysis  will  frequently  show,  with 
comparative  ease  and  accuracy,  what  proportion  of  the  item 
is  chargeable  to  one  or  other  of  the  divisions.  In  other  cases,  as, 
for  example,  that  of  the  president  and  the  higher  executive 
officials,  a  somewhat  arbitrary  determination  has  to  be  made, 
but  if  this  is  done  with  care  after  discussion  of  all  the  circum- 
stances, a  division  can  be  made  that  does  substantial  justice, 
and  allots  to  each  department  a  fair  share  of  the  expense  in 
proportion  to  benefits  received  by  each. 


CHAPTER  II 
THE  MECHANISM  OF  ACCOUNTING 

All  business  transactions  are  in  essence  the  transformation  of 
cash  into  something  else  and  its  return  to  the  condition  of  cash 
again.  In  simple  buying  and  selling  we  begin  by  having  a 
stock  of  cash;  we  exchange  this  cash  for  goods  of  some  kind; and 
then  we  sell  the  goods  for  cash  again.  If  our  business  is  suc- 
cessful our  sale  will  return  the  original  amount  paid  for  the 
goods  plus  an  increase  of  the  total  sum  involved  which  will  be 
our  profit.  We  have  here  two  transformations,  first  of  cash 
into  goods,  then  of  goods  into  cash. 

No  business  is  really  as  simple  as  this.  It  costs  money  to  do 
business.  In  other  words  all  businesses  have  expenses — rent, 
postage,  stationery,  car-fares — at  the  very  least.  But  this 
means  that  the  transformations  of  cash  will  be  correspondingly 
complex.  We  begin  with  a  stock  of  cash,  as  before.  But  only 
part  of  it  is  transformed  into  goods  for  sale.  Other  portions 
arc  transformed  into  rent,  into  letter-paper,  bill-heads,  business 
cards  and  envelopes,  into  postage  stamps,  and  into  car-fares. 
When  our  goods  are  sold  we  have  to  get  a  price  large  enough  to 
replace  the  original  goods,  to  pay  for  the  rent,  stationery,  stamps 
and  fares,  and  still  leave  a  surplus  or  profit. 

The  object  of  accounting  is  to  enable  us,  either  at  wide  intervals, 
or  frequently,  to  find  out  what  is  the  present  condition  of  our 
original  stock  of  cash,  which  in  business  language  is  termed  our 
capital.  Bookkeeping  is  the  mechanism  by  which  we  are 
placed  in  a  position  to  observe  how  we  stand.  Accounting  is 
the  interpretation  of  the  results  presented  by  bookkeeping. 

Tin-  mechanism  by  which  the  results  of  any  business  whether 
Large  or  small  are  brought  to  a  focus  is  a  very  simple  one.  Per- 
haps from  this  very  simplicity  it  is  not  grasped  by  everyone  as 
it  should  be  The  elements  of  bookkeeping,  of  which  we  are 
now  going  to  speak,  should,  therefore,  be  mastered  by  everyone 
who  aspires  to  understand  manufacturing  accounts. 

This  mechanism,  or  we  might  almost  say,  these  tools  of  the 
accountant  are  four: 

12 


THE  MECHANISM  OF  ACCOUNTING  13 

1.  Books  of  original  entry,  in  which  transactions  are  recorded. 
These  transactions  are  always  of  the  nature  of  transformations, 
such  as  cash  into  goods  or  services;  goods  and  services  into 
work  in  process;  work  in  process  into  finished  and  salable  goods; 
salable  goods  into  sales  on  credit;  sales  on  credit  into  cash 
received;  and  so  on. 

2.  Journals. — These  are  frequently  combined  with  books  of 
original  entry,  and  serve  to  indicate  the  destination  of  the 
transactions  summarized  in  them;  such  as  cash  received  by  check, 
which  is  credited  to  the  persons  paying  it,  and  charged  against 
Bank,  and  so  forth. 

3.  Ledger  Accounts. — The  nature  of  a  ledger  account  should 
be  thoroughly  studied  because  it  has  a  somewhat  abstract  sig- 
nificance in  many  cases.  Some  ledger  accounts  are  simple 
enough,  such  as,  for  example,  the  cash  account.  We  may  view 
it  as  two  columns  of  figures.  That  on  the  left  sums  up  all 
the  cash  we  have  paid  into  the  till.  That  on  the  right  sums  up 
all  that  we  have  taken  out  of  the  till.  If  at  any  time  we  add 
up  both  columns,  the  "balance,"  or  difference  between  them, 
will  represent  obviously  the  amount  of  cash  left  in  the  till. 
Such  an  account  is  a  real  account.  It  represents  actual,  tangible 
property.  Any  balance  that  remains  in  it  must  necessarily 
always  be  on  one  side,  because  it  is  impossible  that  more  cash 
can  be  paid  out  than  has  come  in. 

All  ledger  accounts,  however,  are  not  of  this  simple  and  obvious 
character.  They  do  not  always  represent  tangible  assets  or 
property.  This  arises  from  the  nature  of  double-entry  book- 
keeping which  demands  that  every  transaction  be  entered  twice, 
corresponding  to  both  sides  of  the  transformation  involved. 
Every  transformation  involves  considering  "what  it  was,"  and 
also  "what  it  has  become."  And  both  these  facts  must  be  repre- 
sented in  ledger  accounts. 

Thus,  to  take  the  simplest  case  above,  we  begin  with  a  balance 
of  cash  in  one  ledger  account,  and  this  is  balanced  by  a  corre- 
sponding item  of  capital  in  another  ledger  account.  Whatever 
transformations  we  effect  in  the  form  of  cash,  the  value  of  these 
must  always  balance  with  the  entry  of  capital,  until  we  have 
either  made  a  profit  (which  is  an  addition  to  capital)  or  a  loss 
(which  means  that  our  capital  has  diminished). 

When  we  buy  goods,  the  transformation  must  be  recorded  in 
both  its  aspects:  (1)  Cash  must  be  credited;  (2)  Goods  must  be 


14 


MANUFACTURING  costs  AND  ACCOUNTS 


charged.  If  we  have  spent  all  our  cash  in  buying  goods,  the 
"balance"  in  the  ledger  account  for  Cash  will  be  wiped  out  by  the 
credit.  And  the  ledger  account  for  Goods  will  contain  an  equal 
value,  which  will  balance  the  entry  in  Capital  account  as  before. 
These  transactions  are  not  easy  to  follow  in  words  unless  one 
is  familiar  with  the  subject.  And  when  more  detailed  and  intri- 
cate mailers  have  to  be  traced,  great  familiarity  will  not  always 
prevent  errors.  It  is,  therefore,  highly  desirable  to  use  symbols 
in  tracing  accounting  schemes,  and  the  system  to  be  followed  in 
this  work  will  now  be  explained,  and  the  above  simple  cases 
worked  out  on  it. 


When   commencing   business   we   charge    Cash    Account 

with  the  $1000  cash  we  possess,  and  at  the  same  time 
credit  our  own  Capital  Account,  or  Selves  with  an  equal 
amount.  Capital  Account  represents  Ownership,  and 
Cash  Account  the  property  owned.  Through  all  business 
changes  Ownership  and  Property  must  always  be  kept 
equal,    or     balanced'.' 


Capita]  Cash  Goods 

BaL    CrlOOO  BaL    DrlOOO 

Fig.  2. — Diagram   representing  ledger  accounts  before  starting  business. 


A  ledger  account  is  conveniently  symbolized  by  means  of  a 
circle  divided  vertically  so  as  to  represent  the  debit  and  credit 
sides.  A  circle  is  selected  to  distinguish  ledger  accounts  readily 
from  all  olhcr  books  and  blanks,  which  must  necessarily  be  drawn 
as  rectangles  owing  to  their  variety  of  size,  shape  and  lettering. 
Fi^.  2,  therefore,  symbolizes  the  state  of  affairs  in  the  simplest 
case  spoken  of  above,  wherein  we  commence  with  $1,000  cash. 
In  opening  the  books,  our  proprietorship  in  the  cash  is  represented 
by  an  entry  of  $1,000  to  the  credit  of  selves,  or  in  other  words  to 
the  credit  of  Capital  account. 

Thifi  Lb  because  the  underlying  principle  of  double-entry  book- 

balance  between  proprietorship  on  the  one  hand 

and  goods  or  property  od  1  he  o1  her.     As  we  shall  see  in  the  simple 


THE  MECHANISM  OF  ACCOUNTING 


15 


cases  to  be  discussed,  this  balance  is  always  maintained,  however 
various  the  changes  or  transformations  that  take  place  in  our 
property.  If  we  abstract  the  balances  in  the  above  accounts 
they  form  a  Balance  Sheet  thus: 


Assets 

Cash  in  hand,  $1,000. 


Capital  and  liability 

Capital,  $1,000. 


We  will  now  suppose  that  we  part  with  some  of  our  cash  and 
receive  goods  in  exchange.  We  have  now  to  introduce  into  our 
diagram  a  new  feature,  namely,  a  book  in  which  transactions  are 
recorded.     In  modern  practice  such  books  of  original  entry  are 


Cash  Journal 


Note: 

Ownership  remains  as 
before,  but  property  is 
now  of  two  kinds,  viz 
cash   and    goods. 


Note: 

Only  the  total  of  transactions 
in  the  journal  is  used  for  posting 
purposes.  There  might  for  Instance 
have  been  40  transactions  averaging 
20  dollars  each,  or  800  transactions 
averaging  one  dollar  during  the 
month.      The   journal   thus  collects 

amounts,  and  the  total  of  these 

amounts  is  posted  ad 


Cash 
CrlOOO  Bal.=Dr200 

Fig.  3. — Diagram  showing  simple  case  of  goods  purchased  for  casb.  The 
balances  below  the  ledger  accounts  are  those  remaining  after  the  entries 
have  been  made. 

Note:  Plain  lines  =  debits  or  charges.     Dotted  lines  =  credits. 

when  possible  made  into  "journals"  or  posting  mediums  also, 
so  that  certain  frequent  classes  of  transactions  can  be  totalled 
separately  and  posted  in  a  lump  sum  to  the  ledger  accounts 
affected.  The  alternative  to  this  is,  of  course,  separate  posting 
of  each  item.  Arranging  original  books  of  entry  as  journals  is, 
therefore,  a  labor-saving  device  of  an  important  character. 

Figure  3  represents  a  very  elementary  form  of  this  kind. 
As  only  one  transformation  is  concerned,  namely,  Cash  into 
Goods,  only  one  column  is  required  to  record  the  amounts. 
WTien  we  have  purchased  $800  worth  of  goods  for  $800  cash,  and 
have  recorded  the  transactions,  the  results  will  be  as  shown  in 


16       MANUFACTURING  COSTS  AND  ACCOUNTS 


THE  MECHANISM  OF  ACCOUNTING  17 

Fig.  3.  The  book  of  original  entry  shows  the  total  of  the  transac- 
tions (S800)  and  from  the  column  recording  this  two  lines  start, 
one  dotted,  which  represents  a  credit,  and  one  plain,  which  repre- 
sents a  charge  or  debit.  Cash  account  is  thereby  shown  to  be 
credited  with  $800  and  Goods  account  is  shown  to  be  debited 
with  $800.  Starting  at  the  posting  medium  or  journal,  and 
following  the  lines  we  can  see  just  what  accounts  are  reached  and 
affected  by  the  transactions  recorded  in  the  journal.  In  this  case 
the  whole  matter  is  very  simple  but  in  the  course  of  this  book  we 
shall  find  the  use  of  this  kind  of  symbolizing  very  useful  to  explain 
complicated  transactions.  Its  principle,  should,  therefore  be 
thoroughly  mastered  by  the  reader  at  this  stage. 

The  transactions  shown  in  Fig.  3  can  now  be  subjected  to  the 
test  of  a  Balance  Sheet,  thus: 

Assets  Capital  and  liabilities 

Cash  in  hand,    $200 

Goods  in  hand,  $800  Capital,  $1,000 


$1,000  $1,000 

From  this  we  see  that  our  transformation  of  cash  into  goods 
has  not  affected  the  balance  between  capital  or  proprietorship 
and  assets  or  property.  The  only  difference  is  that  our  capital 
is  now  represented  by  two  kinds  of  property  instead  of  one,  but 
the  totals  of  Property  accounts  equal  Capital  account  just  the 
same.  We  must  now  extend  the  system  to  the  representation 
of  the  second  simple  case  mentioned  above,  in  which  cash  is  paid 
out  not  only  for  goods,  but  also  for  certain  business  expenses. 
Fig.  4  shows  the  extension  of  the  symbolization  to  cover  this  case. 

In  this  figure  the  journal  is  shown  at  an  advanced  stage  of 
development.  On  the  left  side  the  items  are  recorded  and  their 
amounts.  On  the  right  side  a  series  of  columns  is  provided, 
each  of  which  is  devoted  to  collecting  the  amounts  relating  to  one 
class  of  transaction.  In  entering  up  a  transaction  the  amount  is 
first  entered  on  the  left-hand  column,  and  then  "allocated" 
to  one  or  other  of  the  columns  on  the  right.  Allocation  means 
determining  to  what  account  the  item  is  properly  chargeable. 
In  practice,  of  course,  the  headings  of  the  columns  would  be 
selected  to  represent  the  more  frequent  classes  of  transactions, 
and  each  such  column  would  have  many  entries  in  it.  Infrequent 
allocations  are  placed  in  a  spare  column  at  the  right  hand,  and 
are  separately  posted  to  the  ledger  accounts  affected. 

2 


18        MA  A"  L  FACTURING  COSTS  AND  ACCOUNTS 

The  journal  records  a  total  payment  of  $910  cash,  which  is 
accordingly  credited  to  Cash  account.  Now  as  the  total  alloca- 
tions must  always  equal  the  left-hand  column,  we  shall  expect 
to  find  various  accounts  charged  with  items  equal  in  total  to 
Following  the  plain  lines  we  find  that  this  is  actually  so. 
has  been  charged  to  Goods  and  smaller  amounts  to  Rent,  Sta- 
tionery, Postage  and  Traveling,  making  $910  in  all. 

All  these  transformations  of  cash  having  been  recorded  and 
completed,  the  next  question  is  whether  our  assets  are  still 
equal  to  our  capital.  Before  answering  this  question,  certain 
peculiarities  of  the  new  ledger  accounts — Rent,  Stationery, 
Postage  and  Traveling — must  be  considered. 

We  have  seen  that  Cash  and  Goods  are  both  "real"  accounts, 
that  is,  they  represent  actual  tangible  property.  But  none  of 
these  new  accounts  represent  anything  in  our  possession.  We 
have  paid  the  rent  to  the  landlord,  have  used  up  the  stationery, 
have  put  the  postage  stamps  on  our  letters,  and  the  traveling 
money  has  been  dropped  into  the  boxes  of  the  street  cars. 
Obviously,  therefore,  the  balances  in  these  accounts  do  not 
represent  property.  In  other  words  they  do  not  represent  any- 
thing real.  For  this  reason  such  accounts  are  usually  called 
nominal  accounts.  But  if  they  do  not  represent  anything  real, 
how  can  we  set  them  against  capital  to  preserve  our  Balance 
Sheet  as  before? 

As  a  purely  bookkeeping  proposition  we  cannot  do  so.  If 
we  list  the  assets  and  capital  as  before,  the  result  would  be  as 
follows: 

Assets  Capital  and  liabilities 

Cash  in  hand,     $90 

Goods  in  hand,  $800  Capital,  $1,000 


$890  $1,000 

Obviously  this  will  not  do.  The  Balance  Sheet  no  longer 
balances,  and  the  reason  is  that  on  the  face  of  the  transactions 
we  have  lost  money.  We  have  incurred  expenses  for  doing 
business,  bul  as  yet  our  business  has  only  consisted  in  buying 
goods.  We  have  sold  nothing.  Therefore,  to  restore  equality 
iri  our  Balance  Sheet  we  should  have  to  put  a  new  line  on  the 
left-hand  side  of  the  sheet,  thus: 

Loss,  $110. 

Willi  this  item  included,  the  sheet  would  balance  as  before. 


THE  MECHANISM  OF  ACCOUNTING  19 

The  practical  effect  of  the  item  would  be  to  wipe  out  $110 
of  our  capital  and  reduce  it  to  $890,  the  amount  now  represented 
by  property. 

This  is  the  bookkeeping  viewpoint.  The  accounting  view- 
point might  be  quite  different,  and  this  illustrates  the  difference 
between  bookkeeping  and  accounting.  The  accountant  would 
consider  all  the  circumstances  of  the  case.  The  figures  might 
for  instance  represent  the  first  month's  transactions  *of  a  new 
firm,  and  in  such  a  case  it  would  not  be  practically  true  that 
capital  had  been  lost.  The  balances  in  the  nominal  accounts 
might  be  looked  at  in  the  light  of  expenditure  that  would 
speedily  bring  results,  and,  therefore,  need  to  be  held  up  or  "sus- 
pended" for  a  time.  Cases  like  this  frequently  occur,  as  for 
instance  when  a  large  sum  has  been  paid  out  for  "goodwill" 
which  is  held  up  and  only  liquidated  by  degrees.  Another 
example  may  be  found  in  heavy  expenditure  on  an  advertizing 
campaign,  part  of  which  is  suspended  and  spread  over  future 
months.  Naturally,  decisions  as  to  what  may  be  legitimately 
held  up  in  this  way  require  mature  experience,  for  otherwise 
great  danger  is  involved. 

Supposing,  however,  that  it  is  decided  to  "suspend"  the 
expenditure  represented  by  the  balances  in  the  nominal  accounts 
for  the  present,  then  the  form  of  the  Balance  Sheet  would  be  as 
under: 

Assets  Capital  and  liabilities 

Cash  in  hand,  $90 

Goods  in  hand,  $800  Capital,  $1,000 

Suspended  expense,   $110 


$1,000  $1,000 

This  restores  the  equation  in  the  Balance  Sheet,  but  at  the 
price  of  introducing  fictitious  assets  into  it,  which  is  only  justi- 
fiable if  the  benefit  of  the  expenditure  represented  by  such 
entry  is  legitimately  chargeable  to  future  transactions. 

This  simple  case  may  be  expanded  one  degree  further.  We 
will  assume  that  in  the  month  following  some  goods  were  sold 
for  cash  at  a  profit.  This  involves  an  entirely  new  element  in 
our  transactions.  Hitherto  all  transformations  have  been 
equal.  So  much  cash  was  transformed  into  an  equal  value  of 
goods,  or  of  stationery  or  postage  stamps.  Now,  however,  we 
sell  $200  worth  of  goods,  and  in  return  receive,  not  $200  cash, 


20        MANUFACTURING  COSTS  AND  ACCOUNTS 

but  $400  cash.  In  other  words  we  have  made  a  gross  profit 
(that  is  a  profit  from  which  the  expenses  of  doing  business  are 
not  yet  deducted)  of  $200.  It  is  desirable,  therefore,  to  arrange 
our  ledger  accounts  so  that  this  item  of  gross  profit  is  isolated,  and 
can  be  seen  separately. 

Figure  5  shows  the  mechanism  necessary.  The  ledger  accounts 
are  the  same  as  in  the  last  example  (Fig.  4)  and  the  transactions 
are  assumed  to  be  those  of  the  period  immediately  following 
the  Balance  Sheet  which  was  prepared  showing  "suspended" 
expenses  amounting  to  $110.  The  book  of  original  entry 
i-  termed  the  Sales  Journal.  Its  peculiarity  is  that  each  item 
is  entered  from  two  aspects,  that  is,  in  two  values.  First,  it 
is  entered  from  the  viewpoint  of  its  cost  at  which  it  stands  in 
t  lie  ( loods  account.  Secondly,  it  is  entered  from  the  viewpoint  of 
the  price  it  has  fetched,  or  its  sale  price.  Briefly,  this  may  be 
summed  up  as  an  entry  of  "What  we  gave  for  it,"  and  another 
entry  of  "What  we  got  for  it."  Each  of  these  entries  must  be 
charged  and  credited  to  ledger  accounts.  Having  made  the 
entries  and  totalled  all  of  them  for  the  period,  we  proceed  to 
post  the  totals  to  ledger  accounts,  just  as  we  did  in  the  case  of 
the  Cash  Journal. 

Taking  the  total  of  cost  of  goods  first,  as  we  have  taken  these 
items  out  of  our  stock  of  goods,  we  credit  Goods  account  with 
their  value.  As  we  have  parted  with  them  to  a  purchaser,  we 
charge  Sales  account  with  the  same  value. 

Taking  the  total  of  sales  at  sale  price  next,  as  we  have  received 
cash  to  the  full  value,  namely  $400,  and  have  put  it  in  the  till, 
we  charge  Cash  with  that  amount.  As  this  money  has  come 
from  the  purchaser  we  credit  Sales  account  with  the  same 
value.  These  credits  and  charges  can  be  very  clearly  followed 
on  the  diagram — dotted  lines  being  credits  and  plain  lines  charges 
or  debits. 

When  all  these  entries  to  ledger  accounts  are  made  and  the 
accounts  themselves  balanced  off,  we  should  be  in  a  position 
to  prepare  another  Balance  Sheet.  As,  however,  we  have  now  a 
complete  cycle  of  transactions  to  consider,  some  of  them  being 
profit  and  some  being  expenses  brought  forward  from  the 
previous  period,  it  will  be  preferable  to  consolidate  the  accounts, 
or  rather  their  balances,  so  as  to  deduct  the  expenses  from  the 
gross  profit-,  and  so  ascertain  net  profit,  thus  making  the  state- 
ment in  the  Balance  Sheet  much  clearer. 


THE  MECHANISM  OF  ACCOUNTING 


21 


02  <£ 


>*0  8 
>      © 


CO 
CO 


o    ^, 


22        MANUFACTURING  COSTS  AND  ACCOUNTS 
The  Trading  account  is  prepared  as  under: 

TRADING  ACCOUNT  FOR  MONTH  OF 


Dr.  Cr. 

To  Expense  accounts,  viz..  By  Sales  account: 

Rent $50  Gross  profit $200 

Stationery $30 

Postage $10 

Traveling $20 

Net  profit $90 


$200 


It  may  assist  the  student  to  show  the  process  of  crediting  and 
charging  involved  in  preparing  such  a  Trading  account.  Fig.  6 
shows  a  Closing  Journal  which  is  the  source  of  the  transactions. 
First,  the  group  of  Expense  accounts  are  individually  credited 
with  the  amount  standing  against  each,  and  then  the  total  for 
the  whole  group  is  charged  to  Trading  account.  Similarly,  the 
balance  in  Sales  account  ($200,  see  Fig.  5)  is  charged  to  that 
account  and  credited  to  Trading.  This,  of  course,  has  the  effect 
of  simple  transfer  of  all  the  items  dealt  with,  from  one  account  to 
another.  All  the  debit  balances  in  the  Expense  accounts  shown 
in  Fig.  5  are  now  transferred  to  the  debit  side  of  Trading  account. 
In  the  same  way,  the  credit  balance  of  $200  which  stood  in  Sales 
account  is  now  transferred  to  the  credit  side  of  Trading  account. 
The  balances  in  the  expense  accounts  and  in  Sales  accounts  are, 
therefore,  wiped  out  completely. 

The  transactions  of  the  Closing  Journal  are  not  transformations 
of  real  things  into  a  new  form.  They  merely  serve  to  rearrange 
certain  of  the  nominal  accounts  and  consolidate  them.  All 
the  property  of  the  firm  is  still  represented  by  the  real  accounts, 
viz.,  Cash  and  Goods.  The  nominal  accounts  simply  serve  to 
explain  why  those  quantities  of  real  property  exist  as  they  are. 
In  the  last  Balance  Sheet,  ( 'ash  and  ( loods  were  less  than  might 
be  expected,  and  the  nominal  accounts  for  expense,  being  ad- 
mitted to  the  Balance  Sheet,  explained  the  shortage.  Similarly, 
in  the  balance  now  to  be  prepared,  based  on  Fig.  6,  though  all 
the  Expense  accounts  have  disappeared,  we  have  a  nominal  ac- 
count, namely  Trading,  which  will  explain  why  we  have  more 
capital  now  than  we  had  at  the  last  Balance  Sheet. 


THE  MECHANISM  OF  ACCOUNTING 


23 


24       MANUFACTURING  COSTS  AND  ACCOUNTS 

Balance  Sheet 

Assets  Capital  and  liabilities 

Cash  in  hand,      $490  Capital,  $1,000 

Goods  in  hand,    $600  Surplus,       $90  (from  Tdg.  A/c) 


$1,090  $1,090 

This  "  surplus  "  is,  of  course,  our  net  profit.  In  this  simple  case 
it  may  be  mentally  checked  by  remembering  that  our  gross  profit 
was  $200,  and  our  expenses  (brought  forward  from  the  last 
Balance  Sheet  as  "suspended")  were  $110.  Deducting  $110 
from  $200  we  have  $90,  the  amount  of  the  net  profit  on  the  whole 
period. 

These  elementary  exhibits  have  been  introduced  for  the  pur- 
pose of  familiarizing  the  reader  with  the  outlines  of  the  mechan- 
ism or  bookkeeping.  Books  of  original  entry  arranged  as 
journals  or  posting  mediums,  ledger  accounts,  and  the  Balance 
Sheet  comprise  the  whole  art  and  mystery.  If  it  be  remembered 
that  every  transaction,  without  exception,  has  two  aspects, 
namely  its  original  condition  and  its  new  condition  (as,  for 
example,  when  cash  is  transformed  into  goods)  and,  therefore, 
that  every  transaction  must  go  through  three  bookkeeping  stages: 

1.  It  must  be  recorded  as  a  transaction. 

2.  It  must  be  debited  or  charged  to  some  account. 

3.  It  must  be  credited  to  some  other  account. 

— if  these  very  simple  facts  are  kept  in  mind,  then  considerable 
progress  will  have  been  made  toward  mastery  of  the  principles 
on  which  all  accounting  rests. 


CHAPTER  III 
THE  MECHANISM  OF  COST  ACCOUNTING 

The  simple  arrangements  for  keeping  track  of  the  results  of 
buying  and  selling  described  in  the  last  chapter  would  require 
supplementing  in  any  business  of  importance  by  mechanism  to 
keep  track  of  credit  transactions.  Instead  of  sales  resulting  in 
an  immediate  return  of  cash,  they  merely  result  in  indebtedness 
on  the  part  of  individual  customers.  At  a  later  stage,  this  in- 
debtedness is  transformed  into  actual  cash,  namely,  when  the 
customer  pays  his  account.  Clearly,  therefore,  we  should  have 
to  provide  an  intermediate  account,  or  rather  set  of  accounts 
(one  for  each  customer)  in  between  Sales  and  Cash.  This 
is  usually  done  by  providing  a  Sold  Ledger  containing  customers' 
accounts,  to  which  are  charged  sales  at  sale  price,  or  indebtedness. 
When  the  customer  pays,  his  ledger  account  is  credited,  and 
Cash  charged  with  the  amount  of  the  payment. 

This  device  of  an  account  placed  in  an  intermediate  position 
to  other  accounts,  so  as  to  take  care  of  peculiar  circumstances  in 
certain  transactions  is  an  important  one.  All  business  transac- 
tion, as  we  have  seen,  form  a  regular  series: 

Cash — purchases — sales — cash. 

When  we  intercalate  a  sold  ledger  into  this  series  it  becomes: 

Cash — purchases — sales — indebtedness — cash. 

Now  when  we  come  to  consider  manufacturing  businesses  it  will 
be  evident,  from  what  was  said  in  Chap.  I,  that  a  new  term  must  be 
placed  midway  in  this  series,  after  purchases  and  before  sales,  to 
represent  the  changes  in  the  condition  of  materials  that  are  brought 
about  by  manufacturing  operations.    The  series  would  then  become : 

Cash — purchases — factory  operations — sales — indebtedness — cash. 

It  is  this  new  intermediate  term  that  we  have  to  discuss  in  this 
chapter. 

Manufacturing  accounts  are  far  more  complex  than  those  of  a 
simple  merchant  business.  Not  only  is  there,  as  a  rule,  a  con- 
siderably greater  variety  of  purchases,  but  in  many  industries  to 
follow  the  history  of  the  combination  of  these  purchases  into 

25 


26        MANUFACTURING  COSTS  AND  ACCOUNTS 

product,  taxes  the  art  of  the  bookkeeper,  and  the  science  of  the 
accountant  to  the  full.  This  is  because  manufacturing  consists 
not  only  in  the  direct  application  of  labor  to  material — though 
this  is  the  obvious  and  popular  conception  of  manufacturing — 
but  also  in  the  setting  up  of  a  whole  series  of  special  organizations, 
of  which  the  services,  though  applied  to  produce  changes  in 
material,  have  rarely  any  real  quantitative  relation  to  the  goods 
produced  by  their  aid. 

As  a  simple  illustration  we  may  take  the  power  house,  which 
has  to  be  established,  maintained  and  operated  in  most  plants 
of  importance.  Now  the  cost  of  producing  power  does  not  vary 
directly  as  the  quantity  of  power  consumed.  A  considerable 
reduction  in  the  demand  may  not  lead  to  any  noticeable  reduc- 
tion in  the  expense  of  producing  and  delivering  power  to  the  shops. 
The  same  remark  applies  to  other  services  set  up  by  the  manu- 
facturer for  the  purpose  of  ministering  to  actual  production — 
they  have  no  direct  ratio  to  production — their  expense  does  not 
fall  as  production  falls,  nor  does  it  rise  as  production  rises,  at 
any  rate  not  in  proportion  to  production  itself. 

Of  course,  much  the  same  might  be  said  of  certain  of  the 
expenses  of  a  merchant  business.  Rent  of  premises,  for  example, 
remains  the  same  when  the  merchant  is  full  of  business,  as  when 
he  is  waiting  for  orders  that  do  not  come.  This  is  true.  But 
in  most  manufacturing  businesses  the  expenses  of  this  class  are 
not  only  very  numerous  and  very  varied,  but  they  form  a  large 
proportion  of  the  total  activity  of  the  plant.  It  is  this  fact  that 
gives  complexity  not  only  to  the  bookkeeping  mechanism  of 
manufacturing  accounts,  but  also  makes  their  account/' ig 
interpretation  difficult. 

In  the  first  chapter  we  saw  that  purchases,  in  regard  to  a 
manufacturing  business,  are  not  all  chargeable  at  once  to  manu- 
facturing operations.  Those  of  which  the  value  is  measured 
by  time,  such  as  wages  and  salaries,  are,  of  course,  so  charged, 
period  by  period.  Material  and  supplies  on  the  other  hand  are 
only  charged  as  they  are  used  or  consumed.  And  the  im- 
portant class  of  purchases  represented  by  equipment  and  build- 
ings, machinery,  etc.,  are  charged  to  Manufacturing  in  a  special 
and  peculiar  way,  namely,  by  what  is  termed  depreciation,  which 
is  really  an  arbitrary  determination  expressing  the  rate  at  which 
the  equipment  is  supposed  to  be  used  up  in  carrying  out  manu- 
facturing operations. 


THE  MECHANISM  OF  COST  ACCOUNTING        27 

In  setting  up  manufacturing  accounts  our  first  care  will  be, 
therefore,  to  provide  mechanism  so  that  each  of  these  kinds  of 
charges  for  things  purchased  shall  reach  manufacturing  account 
at  the  proper  time.  In  other  words,  before  we  consider  manu- 
facturing operations  themselves  we  must  take  measures  to 
assemble  the  elements  of  cost  in  all  their  various  forms,  making 
sure  that  the  right  amount  of  each  belonging  to  a  given  period 
is  charged,  so  that  each  financial  period  bears  its  own  share  of 
the  expenditure  incurred. 

It  is  most  desirable,  at  this  stage,  that  the  reader  shall  get 
rid  of  any  preconceptions  he  may  have  as  to  what  is  termed 
"capital  investment"  in  buildings,  machinery,  equipment,  etc. 
Many  persons  look  on  this  as  something  apart  from  the  ordinary 
nature  of  things  purchased.  The  long  life  of  a  building  or  a 
heavy  machine  and  the  mystery  that  sometimes  surrounds  the 
question  of  what  is  termed  depreciation,  seem  to  lift  these  items 
into  a  class  by  themselves.  Though  this  is  true  to  a  certain 
extent  it  is  important  to  remember  that  when  we  buy  a  build- 
ing or  a  machine  it  is  only  a  purchase  of  something  that  is  used 
up  in  the  process  of  manufacture  just  like  a  gallon  of  oil  or  a  ton 
of  coal  is  used  up.  The  only  difference  is  that  the  consumption 
is  an  invisible  one,  since  it  is  so  slow  that  our  daily  contact  with 
these  articles  does  not  enable  us  to  perceive  any  reduction  in 
their  value. 

But  if  a  visitor  to  a  plant  just  erected  were  to  go  away,  and 
be  absent  for  10  or  15  years,  he  would  on  returning  to  it  (if  he 
had  a  good  memory  of  what  he  observed  at  first)  quite  readily 
see  that  deterioration  had  taken  place.  And  if  instead  of  15  he 
stayed  away  30  or  40  years,  he  would  find  on  his  return  that  the 
hand  of  time  had  lain  heavily  on  this  apparently  imperishable 
capital  investment.  He  would  not  only  observe  deterioration, 
but  almost  certainly  considerable  changes  in  the  equipment — 
newer  types  of  machines  would  have  been  substituted  for  some 
of  those  he  knew.  The  buildings  would  almost  certainly  strike 
him  as  old-fashioned  and  not  up  to  modern  standards,  and  he 
would  observe  probably  that  some  of  them  had  been  altered 
and  patched.  In  short,  observation  of  so-called  capital  invest- 
ment items  at  considerable  intervals  of  time  would  disclose  that, 
just  like  any  other  purchased  article,  they  were  being  used  up 
in  the  course  of  manufacturing  operations. 

It  follows  from  this  that  depreciation  is  not  a  fancy  or  arti- 


28        MANUFACTURING  COSTS  AND  ACCOUNTS 


Cash  Account 


Plant, 
Buildings 
and  Equipment 


Advertizing 
and  Catalogues 


Traveling  Exp. 
of  Salesmen 


Fig.  7.— Principal   classes   of   purchases   in    a   manufacturing   business. 
Note:  Charges  may  be  made  to  any  ledger  account  from  either  journal  if 
necessary. 


THE  MECHANISM  OF  COST  ACCOUNTING        29 

ficial  idea,  but  that  it  is  the  nearest  approximation  we  can  make 
to  a  very  ordinary  fact — the  fact  of  consumption  of  an  article 
by  using  it.  And,  therefore,  if  we  are  to  obtain  the  true  cost  of 
manufacture  of  our  product,  the  value  of  our  equipment  that 
we  use  up  daily,  monthly  and  yearly  must  be  included  in  that 
cost,  just  as  the  cost  of  using  up  a  file  or  a  pound  of  grease  must 
find  its  place  in  cost,  and  for  exactly  the  same  reason.  In 
assembling  our  components  of  cost,  a  charge  for  the  slowly  dissi- 
pating purchase  price  of  buildings  and  equipment  must  be 
carefully  determined  and  regularly  made.  The  amount  of  such 
charge  and  the  basis  on  which  it  is  calculated  need  not  be  dis- 
cussed until  later.  We  must  assume  here  that  such  a  charge 
can  be  calculated,  and  provide  the  mechanism  for  assembling 
it  along  with  the  other  components  of  cost. 

Figure  7  shows  the  first  stage  in  assembling  the  components 
of  cost.  This  diagram  is  not,  of  course,  exhaustive.  It  shows 
only  some  of  the  more  important  and  interesting  classes  of 
purchase,  and  these  are,  for  convenience,  grouped  more  closely 
than  they  would  be  in  practice.  A  single  ledger  account,  for 
instance,  is  given  for  Plant,  Buildings  and  Equipment.  In 
practice,  several  separate  ledger  accounts  would  be  used  for 
such  items,  and  the  same  remark  applies  to  some  of  the  others. 
The  principle  involved  can,  however,  be  better  examined  by 
taking  a  few  important  groups. 

This  principle  is  a  simple  one.  Two  books  of  original  entry 
are  shown.  One  of  these,  the  Purchase  Journal,  represents 
purchases  on  credit;  the  other,  the  Cash  Journal,  represents 
purchases  for  cash.  In  the  first  case  the  total  for  the  month, 
$1,300  is  credited  to  sundry  supply  firms,  and  represents  our 
indebtedness  to  them,  to  be  discharged  by  payment  of  cash  at 
some  convenient  future  date.  The  allocations  of  this  sum 
are  summarized  in  the  various  allocation  columns  and  charged 
to  the  respective  ledger  accounts  as  shown. 

The  same  procedure  is  followed  in  the  case  of  the  Cash  Journal, 
with  the  exception  that  credit  is  made  to  Cash  account — as  the 
money  has  been  paid  out  directly,  such  purchases  not  having  been 
made  on  credit. 

The  issult  of  these  transactions  is  that  we  now  have  a  series 
of  accounts  that  show  the  present  form  of  the  purchases  we 
have  made  during  the  month.     Some  of  these  accounts  will  be 


30 


MAM  7 •'. W  77 'RING  COSTS  A ND  A CCO UNTS 


observed  to  have  balances  in  them,  which  have  been  brought 
down  from  previous  months.  It  is  very  important  to  under- 
stand why  some  have  balances  and  some  not.  The  accounts 
that  contain  balances  are  those  representing  forms  of  purchase 


Depreciation    Journal 


Sundry 
Expenses 


Salesmen'i 
Traveling     | 
Expenses 


Fig.  8. — Credits  to  accounts  shown  in  Fig.  7.     Purchase  transferred,  as  con- 
sumed, to  Factory  and  to  Selling  Dept,  respectively. 

which  do  not  go  immediately  and  directly  to  costs  (or  to  sales 
expense)  but  are  held  up  in  an  intermediate  state  while  only 
the  proper  amount  chargeable  to  one  month's  business  is  taken 
out  of  the  total  each  month. 


THE  MECHANISM  OF  COST  ACCOUNTING        31 

The  first  of  such  accounts  is  Plant,  Buildings  and  Equipment. 
The  balance  brought  forward  represents  the  value  of  these  items 
at  the  end  of  the  previous  month,  after  that  month's  depreciation 
had  been  deducted  and  charged  to  manufacturing.  The  new 
total  $7,000  +  $300  =  $7,300  will  presently,  as  we  shall  see, 
be  subject  to  a  credit  for  the  current  month's  depreciation,  and 
a  new  balance  will  be  carried  forward. 

The  second  such  account  is  Materials  and  Supplies.  A  balance 
of  $1,300  is  brought  forward,  and  this  represents  what  was  left 
in  stores  after  the  previous  month's  actual  consumption  had 
been  deducted  and  charged  to  manufacturing.  To  this  we  have 
added  $800  making  a  new  total  of  $2,100,  and  this  will  presently 
be  subject  to  a  credit  for  materials  consumed  in  the  current 
month,  leaving  a  new  balance  to  go  forward. 

The  third  such  account  is  Rent,  Taxes,  Insurance  and  similar 
items.  Though  this  is  not,  like  the  foregoing,  a  property  account, 
but  an  expense  account,  still  it  is  a  kind  of  purchase  that  needs 
measuring  out,  month  by  month  in  definite  amounts,  quite 
irrespective  of  the  actual  amounts  that  may  have  been  invoiced 
in  any  period.  Thus  it  may  be  customary  to  have  bills  rendered 
for  such  times  every  6  months,  or  even  annually,  but  we  must 
not,  therefore,  charge  Production  with  the  whole  sum  so  invoiced 
at  once.  The  total  yearly  expenditure  on  such  items  must 
be  determined,  and  Production  charged  with  one-twelfth  of  the 
total  amount.  The  balance  of  $70  in  this  account  represents 
items  billed  to  us,  but  not  yet  charged  to  production.  After 
adding  the  new  amount  $50  we  have  a  total  of  $120,  from  which 
presently  we  shall  deduct  the  proper  monthly  charge  and  carry 
the  balance  forward.1 

The  Stationery  and  Supplies,  and  Advertising  and  Catalogues 
are  obviously  of  the  same  character  as  Materials  and  Supplies 
already  mentioned.  The  balances  in  these  accounts  represent 
property  in  hand,  and  not  yet  issued  for  consumption. 

On  the  other  hand,  Wages  and  Salaries,  being  payable  for  the 
current  month's  work,  are  chargeable  at  once,  without  any  portion 
being  held  back  or. suspended.     Sundry  Expenses,  and  Traveling 

1  Sometimes  the  regulation  of  items  like  rent,  etc.,  is  effected  by  passing 
"proforma"  invoices  through  the  Purchase  Journal  for  the  actual  month's 
proportion.  Credit  is  made  to  the  personal  account  of  the  landlord,  etc. 
The  practice  is  not  a  good  one. 


32        MANUFACTURING  COSTS  AND  ACCOUNTS 

Expenses  of  Salesmen  are  similarly  chargeable  against  current 
month's  work. 

The  principal  items  of  purchase  are  now  assembled  in  ledger 
accounts,  ready  for  allocation  to  the  places  they  belong.  To 
do  this  a  new  set  of  journals  comes  into  play,  serving  to  analyze 
and  guide  the  analyzed  amounts  to  their  proper  destination. 
The  mechanism  for  this  step  is  shown  by  Fig.  8. 

It  will  have  been  noted,  however,  that  the  arrangements 
just  described  are  merely  an  extension  of  the  simple  purchase 
mechanism  described  in  the  last  chapter.  All  that  we  have  done 
so  far  is  to  sort  out  our  purchases  into  certain  broad  groupings, 
corresponding  to  peculiarities  that  it  is  important  to  keep  in  mind. 
We  have  collected  items  that  we  are  going  to  charge  at  once  to 
Production,  such  as  Factory  Wages,  in  one  account,  items  that  we 
are  going  to  charge  at  once  to  Selling  Expense,  such  as  Traveling 
Expenses,  in  another  account,  and  we  have  also  provided  separate 
accounts  for  such  items  as  are  only  passed  to  Production  as  con- 
sumed, such  as  Materials,  Equipment,  Rents,  etc.,  or  only  passed 
to  Selling  Expenses  as  consumed,  such  as  Advertising  and 
Catalogues. 

So  far  we  have  merely  made  a  preliminary  classification  of 
purchases,  we  have  not  yet  intercalated  into  the  series  any  new 
variety  of  mechanism,  or  in  other  words  we  have  not  yet  attained 
the  position  of  being  able  to  do  any  costing.  We  are  still  at  the 
stage : 

Cash — Purchases — 

only  we  have  introduced  into  the  system  a  greater  variety  of 
purchases  and  have  correspondingly  developed  our  system  of 
ledger  accounts  to  record  them. 

Before  leaving  the  question  of  purchases,  attention  may  be 
called  to  the  fact  that  in  some  businesses,  notably  machine 
shops  and  engineering  works,  a  not  inconsiderable  portion  of  both 
equipment  and  materials  is  made  in  the  factory  itself.  New 
machines,  tools,  parts  made  in  quantities  for  future  use,  patterns, 
molds,  jigs  and  foundry  flasks,  are  commonly  made  in  such  plants, 
and  from  a  bookkeeping  point  of  view  may  be  regarded  as  pur- 
chases from  selves,  instead  of  from  an  outside  supplier.  In  fact, 
invoices  might  be  passed  through  the  Purchases  Journal,  charging 
the  Equipment  or  other  account  concerned  and  crediting  produc- 
tion,   instead    of    crediting    an    outside   supply    house.     It   is. 


THE  MECHANISM  OF  COST  ACCOUNTING        33 

however,  better  practice  to  employ  a  special  journal  for  this 
purpose,  so  that  this  class  of  transaction  can  be  viewed  separately. 
For  our  present  purpose,  however,  we  need  not  consider  purchases 
from  selves,  since  in  many  plants  no  such  transaction  occurs,  and 
where  it  does,  the  procedure  is  exactly  similar  to  that  adopted  for 
transactions  with  outside  firms,  except  that  Production  is  cred- 
ited instead  of  a  supplying  firm. 

Having  assembled  purchases  in  a  series  of  accounts,  the  next 
stage  is  to  consider  each  of  these  separately,  and  ask  whether 
we  have  all  the  data  necessary  for  charging  each  item  up  to  its 
next  destination,  and  crediting  the  ledger  account  accordingly. 
On  examining  the  accounts  we  see  that  only  in  the  case  of  three 
accounts:  namely,  Factory  Wages  and  Salaries;  Advertising  and 
Catalogues;  and  Salesman's  Traveling  Expense,  are  we  sure  of 
the  destination "  of  the  purchase  in  question.  Both  the  latter 
are  obviously  matters  of  marketing  the  product  and  have  nothing 
to  do  with  manufacture.  We  need  not  concern  ourselves  further 
with  the  amounts  in  these  two  accounts,  but  will  leave  them  as 
they  are  until  we  take  up  the  question  of  Sales  Expense. 

The  remaining  accounts  tell  us  nothing.  We  do  not  know 
how  much  of  each  is  to  be  charged  to  Production  and  how  much  if 
any  is  to  be  charged  to  Selling  Expense.  This  can  be  determined 
only  by  obtaining  further  data. 

Such  data  are  forthcoming  by  means  of  a  new  set  of  journals, 
which  carry  the  analysis  or  classification  of  purchases  to  the 
point  that  what  is  chargeable  to  Production  is,  once  for  all, 
separated  from  what  is  chargeable  to  Selling  Expense.  And 
when  this  stage  is  completed  all  the  expenditure  on  Production 
will  be  segregated,  as  well  as  all  the  expenditure  on  Selling. 
In  particular  the  nature  of  the  manufacturing  cost  problem  will 
then  begin  to  shape  itself  before  us.1 

Figure  8  shows  the  further  steps  necessary  to  transfer  the  items 
of  purchase  assembled  in  Fig.  7  to  ledger  accounts  representing 
respectively  Sales  Expense  and  Factory  Cost.  The  ledger  ac- 
counts shown  on  the  left  are  the  same  as  those  shown  on  the  right 

1  In  practice  a  somewhat  shorter  path  is  followed  than  that  indicated 
here,  in  the  case  of  some  of  the  items.  But  the  detailed  method  here  de- 
scribed is  selected  because  it  demonstrates  very  clearly  the  nature  of  the 
operations  that  are  necessary  to  collect  and  analyze  purchases  into  the 
two  groups  of  Production  and  Selling  Expense.  The  shorter  methods 
followed  in  practice  are  the  same  in  principle,  but  more  difficult  for  the 
beginner  to  follow.  They  are  described  in  Part  II. 
3 


34        MANUFACTURING  COSTS  AND  ACCOUNTS 

of  Fig.  7.  The  first  account  containing  the  charges  for  purchase  of 
buildings  and  equipment  is  dealt  with  by  means  of  a  Depreciation 
Journal.  The  entries  in  this  journal  are  based  on  a  grouping  of 
Buildings  and  Equipment  according  to  their  uses,  so  that  all  the 
items  used  for  the  purpose  of  manufacture  are  in  one  group  and 
all  those  used  for  the  purposes  of  storing  finished  goods  and 
selling  are  in  another.  The  depreciation  rates  for  each  group  are 
thus  ascertained  separately,  and  one-twelfth  of  the  annual  total 
charged  through  this  journal  to  Sales  Department  and  Factory 
respectively. 

The  whole  question  of  calculating  depreciation  charges  and 
grouping  the  items  must  be  left  till  a  later  chapter.  All  that  need 
be  considered  now  is  that  it  is  feasible  to  so  separate  and  charge 
the  depreciation  rates.  The  result  of  the  operation  is  that  we 
now  have  two  accounts  (on  the  right  hand  of  diagram)  containing 
charges  for  Factory  Depreciation  and  Sales  Department  Depre- 
ciation respectively,  while  a  credit  for  the  total  of  these  two 
amounts  is  made  to  the  Buildings  and  Equipment  account. 

The  next  account  to  be  dealt  with  is  that  for  Materials  and 
Supplies.  As  these  are  kept  in  stores,  the  journal  which  records 
their  issue  to  the  factory  or  to  the  sales  department,  is  called 
the  Stores  Issues  Journal.  Each  item  is  entered  and  priced 
out  as  issued,  and  allocated  to  one  or  other  of  the  columns 
shown.  When  the  whole  month's  transactions  are  complete, 
the  totals  are  added,  and  the  grand  total  of  issues  credited  to 
Materials  and  Supplies  account.  The  individual  totals  of  issues 
to  factory  and  sales  department  respectively  are  charged  to  the 
two  accounts  shown  on  the  right  hand.  By  this  operation  we 
have  credited  Materials  for  everything  that  has  been  taken  out 
of  stores  and  have  charged  either  Factory  or  Sales  Department 
with  the  proportion  used  by  each.  In  practice  the  issues  to 
sales  department  are  comparatively  trifling. 

Other  accounts:  viz.,  Rents,  etc.;  Stationery,  etc.;  Wages  and 
Salaries  not  belonging  to  Factory;  Sundry  Expenses,  have 
now  to  be  considered.  These  are  called  Administrative  Expense, 
because  some  part  of  each  belongs  to  a  class  of  expenditure  that 
is  of  a  generally  administrative  nature,  such  as  the  upkeep  of 
the  general  office,  salaries  of  the  higher  officials,  etc.  The  divi- 
sion of  these  items  between  the  two  active  departments,  namely 
Sales  and  Factory,  is  a  matter  of  careful  determination  and 
adjustment,  the  basis  of  which  must  be  left  to  a  later  chapter.     It 


THE  MECHANISM  OF  COST  ACCOUNTING        35 

is  sufficient  to  note  here  that  such  a  division  can  be  made,  so 
that  all  expenses  of  this  class  can  be  allocated  either  to  Sales  or 
Factory.  As  in  the  case  of  Depreciation,  one-twelfth  of  the 
annual  amount  of  items  like  rent,  insurance,  etc.,  is  entered  on 


Buildings  /  \ 

and       (6725  I 

Equipment  \  / 


Materials 

and 

Supplies 


Rents,  Taxes  /  \ 

and      I     80  J 

Insurance  V  / 


Accounts  Representing 

Balance  of  Purchases 

on  Hand  after  Deducting 

Current  Months  Consumption 


Advertizing,/  \ 

and        (   350  ] 

Catalogue  \  / 

Salesmen  f  \ 

Traveling  I     40  ) 

Expenses  V  / 


Sales  Dept, 
Depreciation     60 


Accounts  Chargeable 
to  Selling  Dept. 


Factory 
Depreciation 


0 


Factory        /  \ 

Wages  and     (   140°  ) 

Salaries       V  / 

Factory       /  \ 
900 

Stores  Issues  \  / 

KLy 


Accounts  Chargeable 
to  Factory 


Fig.  9. — Accounts  shown  in  Fig.  S  after  all  journal  entries  have  been  com- 
pleted. There  are  three  groups,  viz.:  Balances  left  in  Purchases  accounts 
as  shown  in  Figs.  7  and  8,  and  Balances  in  the  new  accounts  pertaining  to 
Selling  Dept.  and  Factory  respectively. 

the  journal,  and  credited  to  the  different  accounts  concerned,  and 
the  totals  charged  to  Factory  Administrative  Expense,  and  Sales 
Administrative  Expense  respectively,  as  shown  by  the  diagram. 
Stationery  is  charged  according  to  consumption  and  the  other 
items  according  to  actual  amounts  expended. 


3G        MANUFACTURING  COSTS  AND  ACCOUNTS 

The  only  accounts  not  dealt  with  on  the  right  hand  of  the 
diagram  are  Advertising,  etc.;  Factory  Wages,  etc.;  and  Sales- 
men's Expenses.  No  journalizing  is  necessary  for  these  at  this 
stage,  since  their  destination  is  sufficiently  indicated.  Ad- 
vertising and  Catalogues  obviously  belongs  to  Sales  Department; 
Factory  Wages  to  Factory;  and  Salesmen's  Expenses  to  Sales 
Department. 

Figure  9  shows  the  stage  at  which  we  have  now  arrived, 
after  all  the  charges  and  credits  have  been  made  and  the  accounts 
balanced  off.  It  will  be  seen  that  there  are  now  three  groups  of 
accounts.     The  first  group  contains: 

Balance  of  buildings  and  equipment  on  hand  at  month  end. 

Balance  of  materials  and  supplies  on  hand  at  month  end. 

Balance  representing  amount  of  payments  for  rent,  insurance, 
etc.,  not  yet  due  to  be  charged  to  Factory  or  Sales. 

Balance  representing  stationery  on  hand  unused,  at  month  end. 

Three  of  these  accounts  represent  property  on  hand,  and  the 
other  represents  "held  up"  expense  as  already  explained. 

The  next  group  of  accounts  comprises  those  which  are  charge- 
able to  Sales  Department.     These  will  be  considered  later. 

The  third  group  of  accounts  comprises  those  chargeable  to 
Factory,  namely: 

Factory  depreciation. 

Factory  wages  and  salaries  (brought  from  left  hand  of  Fi^,. 
8  without  journalizing). 

Factory  stores  issues. 

Factory  share  of  administrative  expenses. 

These  last  four  accounts  are  the  components  of  factory 
cost.  They  represent  what  has  gone  into  the  factory.  Our 
next  task  will  be  to  see  how  the  product  which  results  can  be 
connected  with  these  components  of  cost  so  that  we  can  price  out 
each  delivery  of  product  and  so  be  able  to  credit  Production  with 
the  factory  cost  of  all  the  articles  produced. 


CHAPTER  IV 

MECHANISM  FOR  CONNECTING  COST  WITH 
PRODUCT 

The  essential  feature  of  cost  accounting  is  the  connection  of  the 
expenditure  incurred  in  manufacturing,  with  individual  quantities 
or  items  of  product.  As  we  have  seen  in  the  last  chapter,  the 
first  step  in  manufacturing  accounts  is  to  assemble  all  com- 
ponents of  cost  chargeable  in  one  month,  and  to  charge  them 
to  certain  ledger  accounts.  The  next  step  is  to  clear  these 
particular  accounts  and  charge  them  to  Manufacturing  account. 
This  provides  us  with  definite  information  as  to  what  has  gone 
into  the  factory,  and  it  will  be  obvious  that  the  final  step  is  to 
provide  data  that  will  enable  us  to  say  what  has  come  out  of  the 
factory. 

As  the  factory  exists  for  making  product,  and  as  product 
comes  out  of  the  factory,  the  data  we  require  must  be  based 
on  the  quantity  of  product  delivered  out  of  the  factory.  We 
must,  therefore,  establish  a  connection  between  dollars  of  cost 
and  weight,  length,  number  or  individual  pieces  of  product. 

When  we  have  done  this,  and  not  before,  can  we  make  the 
necessary  credit  to  Manufacturing  account  for  the  work  ac- 
complished by  the  factory  in  the  month. 

We  are  now  approaching  the  most  interesting  and  at  the 
same  time  the  most  difficult  problems  with  which  we  have  to 
deal.  Hitherto  what  we  have  done  is,  in  principle,  common  to 
all  kinds  of  manufacturing  business.  It  has  consisted  in  isolating 
from  other  items  just  those  charges  which  have  been  incurred 
for  the  sake  of  production.  This  must  always  be  done,  what- 
ever the  kind  of  business  with  which  we  are  dealing.  But  from 
now  onward  the  mechanism  we  set  up  will  depend  entirely  on 
the  nature  of  the  business  and  the  degree  to  which  detail  is 
desirable. 

As  there  are  hundreds  of  types  of  manufacturing  business  it 
is  obviously  impossible  to  attempt  to  provide  specific  description 
of  the  mechanism  suitable  for  each.  Fortunately,  however,  the 
elements  or  components  of  cost  are  comparatively  few,  and  they 

37 


38       MANUFACTURING  COSTS  AND  ACCOUNTS 

can  be  combined  with  product  only  in  a  limited  number  of 
wa}'S.  Consequently  instead  of  having  to  consider  innumerable 
kinds  of  business,  we  can  confine  our  attention  to  a  few  types  of 
cost  methods.  These  few  methods  cover  the  principles  on  which 
all  cost  accounts  in  any  kind  of  business  must  necessarily  be 
based. 

There  are,  to  begin  with,  two  broad  types  of  cost  methods — 
non-departmental  and  departmental.  Only  very  simple  kinds  of 
business  can  be  handled  on  the  non-departmental  plan.  The 
large  majority  of  plants  contain  such  diversified  kinds  of  opera- 
tions that  correct  costing  is  possible  only  by  isolating  each  main 
class  of  operation,  calling  it  a  department  and  costing  it  by  itself. 
But,  for  example,  a  firm  confining  itself  to  machine-printing  for 
the  trade  by  the  aid  of  a  set  of  machines  all  about  the  same 
size  and  capacity,  or  a  dyeworks  handling  one  class  of  goods,  or  s 
jobbing  founds  doing  only  hand-molding — all  these  are  examples 
of  simple  businesses  Avhich  contain  only  one  department,  and 
therefore  belong  to  the  non-departmental  type. 

But  if  the  machine-printing  firm  set  up  a  composing  room,  or 
a  linotype  shop;  or  if  the  foundry  added  a  machine  shop  to  its 
business,  then  departmentalization  would  become  necessary. 
Generally  speaking,  most  firms  carry  on  several  different  types  of 
production  simultaneously,  even  though  the  same  product  is 
carried  through  all  of  them,  and  wherever  this  condition  exists 
departmentalization  is  necessary.  It  is  also  desirable  when,  as 
for  example  in  engineering  works,  certain  machines  are  grouped 
together  for  a  special  purpose,  even  though  other  departments 
may  contain  exactly  similar  machines. 

Though  non-departmental  accounts  present  the  simplest  case, 
they  need  hardly  be  treated  as  a  separate  description  of  cost 
accounts,  because  after  all,  the  non-departmental  type  is  really  a 
case  of  a  business  with  one  department.  There  is  no  difference 
in  the  methods  applied  within  the  shops  between  a  business 
having  but  one  department  and  a  single  department  of  a  more 
complex  business.  With  the  proviso  that  it  is  kept  in  mind  that 
some  types  of  business  have  only  one  department,  we  may  pro- 
ceed to  consider  the  remaining  features  of  cost  accounting. 

Just  as  we  allocated  current  purchases  between  the  factory 
and  the  sales  department,  so  to  begin  with  we  make  an  allocation 
of  factory  cos(  elements  to  various  departments,  if  there  is  more 
than  one.     All  the  factory  cost  elements  are  thus  allocated.     The 


CONNECTING  COST  WITH  PRODUCT 


39 


Factory  Share 

of 

Administration 

Expense 


Wages  and  Salaries 


Share  of  Ad.  Exp 


ALL  EAST  DEPT.  SOUTH  DEPT.  Y<  EST  DEPT. 

FACTOEY  DEPTS. 

Fig.   10. — Departmentalization  of  cost  elements. 
Note:  Journalising  would  be  effected  by  subdivided  columns  in  journals 
chown  in  Fig.  8. 


40        MANUFACTURING  COSTS  AND  ACCOUNTS 

result  is  that  instead  of  one  general  factory  cost  elements  group 
of  accounts  as  shown  in  Fig.  9,  we  have  now  a  set  of  separate 
departmental  cost  element  accounts  as  shown  by  Fig.  10. 

Figure  9  represents  in  fact  the  cost  element  as  arranged  for  a 
single  or  non-departmental  business.  If  the  business  were  or- 
ganized in  departments,  then  the  journalizing  made  in  Fig.  8 
would  be  extended  to  allocate  the  elements  at  once  into  depart- 
mental groups  instead  of  into  a  single  factory  group.  For  this 
reason  Fig.  10  shows  no  journals.  The  three  departmental 
groups  of  accounts  may  be  considered  as  derived  directly  from 
Fig.  8,  by  means  of  additional  columns  in  the  journals  there  shown. 

We  have  now  arranged  our  cost  elements  in  three  groups  cor- 
responding to  as  many  departments  engaged  in  turning  out  prod- 
uct. For  all  practical  purposes  each  department  is  a  separate 
factory,  and  we  can  arrange  our  cost  mechanism  to  suit  the  par- 
ticular type  of  work  done  in  it,  quite  irrespective  of  the  cost 
mechanisms  which  may  be  suitable  for  the  other  departments. 
To  begin  with,  therefore,  it  will  be  desirable  to  know  what  different 
kinds  of  cost  mechanisms  are  available,  and  in  what  the  difference 
between  them  consists. 

Material  entering  into  product  presents  no  special  difficulty. 
It  is  charged  direct  to  the  unit  quantity  of  product  selected  for 
costing,  whatever  that  may  be.  Material  entering  into  product 
is  frequently  called  direct  material. 

The  remaining  components  of  cost  are  depreciation;  the  de- 
partment's share  of  administrative  expense;  stores  and  supplies 
not  entering  into  product,  but  used  up  on  maintenance  or  repair; 
and  wages  and  salaries.1  The  latter  item,  as  will  be  seen  pres- 
ently, frequently  requires  further  analysis.  It  is  made  up  of  two 
different  classes  of  item — wages  and  salaries  of  persons  not  process 
workers  and  wages  of  operatives  who  are  engaged  on  process 
work  on  product.  The  latter  operatives  are  spoken  of  as  direct 
labor,  and  their  wages  are  called  direct  wages,  meaning  that  they 
are,  in  many  cases,  chargeable  direct  to  unit  quantity  of  product, 
same  as  material. 

If  we  analyze  Wages  and  Salaries  account  in  this  way  we 
divide  it  into  two  portions,  viz.: 

1.  Direct  labor  (or  direct  wages). 

2.  Expense  labor   (or  expense  wages),   sometimes  called   in- 

1  This  assemblage  of  cost  components  is  not  exhaustive,  but  may  be 
re^nnled  as  a  typical  example. 


CONNECTING  COST  WITH  PRODUCT  41 

direct  labor  or  indirect  wages.  This  latter  class  is  simply  what 
is  left  after  deducting  direct  labor.  By  whatever  term  it  is  called 
it  really  means  "not-direct"  labor. 

We  shall  see  immediately  that  this  distinction  is  of  great 
importance,  since  the  main  varieties  of  cost  system  hinge  on 
the  manner  in  which  direct  labor  and  direct  material  on  the  one 
hand,  and  all  the  remaining  elements  of  cost,  on  the  other,  are 
applied  to  product. 

The  components  of  cost  will  now  stand  as  follows: 

1.  Material  entering  to  product  (direct  material). 

2.  Direct  labor. 

3.  Administrative  expense. 

4.  Stores  and  supplies  (indirect  material). 

5.  Expense  wages  and  salaries  (indirect  wages,  etc.). 

6.  Depreciation. 

These  last  four  items  form  a  group  by  themselves,  and  this  group 
bears  various  names,  such  as  overhead,  expense,  burden,  etc.  We 
shall  generally  refer  to  it  as  expense. 

The  elements  of  cost  are  now  consolidated  into  three  groups, 
namely : 

1.  Direct  material. 

2.  Direct  labor. 

3.  Expense  (made  up  of  items  3,  4,  5  and  6,  above). 

The  art  of  costing  consists  in  connecting  these  items  with  unit 
quantity  of  product.  Direct  material  being  always  charged 
straight  to  unit  quantity  we  are  left  face  to  face  with: 

1.  Direct  labor. 

2.  Expense. 

and  our  problem  is  how  to  apply  these  to  product,  so  that  on 
taking  up  a  piece  of  the  latter  we  can  say  what  it  has  cost. 

There  are  three  main  conditions  governing  the  selection  of  an 
appropriate  cost  system,  viz. : 

The  method  in  which  direct  labor  and  expense  are  applied  to  the 
product. 

The  unit  quantity  of  product  selected  for  costing. 

The  degree  of  detail  required  in  the  costing  of  this  unit  quantity. 

Each  of  these  main  conditions  is  itself  subject  to  variation,  thus: 

METHODS  OF  CHARGING  DIRECT  LABOR  AND  EXPENSE 

(A)  Direct  labor  and  expense  are  merged  and  averaged,  and 
charged  to  unit  quantity  of  product  on  a  time  basis. 


42       MANUFACTURING  COSTS  AND  ACCOUNTS 

(B)  Direct  labor  is  charged  to  unit  quantity  on  a  time  basis. 
Expense  is  averaged  and  charged  as  a  percentage  on  direct 
wages,  or  on  the  time  taken  by  direct  labor  (hourly  burden  or 
percentage  method). 

(C)  Direct  labor  is  charged  to  unit  quantity,  and  expense 
is  similarly  charged  by  means  of  a  machine  rate,  both  on  a  time 
basis  (scientific  machine  rent  method). 

SELECTION  OF  UNIT  QUANTITY  OF  PRODUCT 

(d)  Unit  is  the  whole  output  of  one  class  of  product. 

(e)  Unit  is  less  than  the  whole  output,  but  a  definite  quantity, 
such  as  500  lb.  or  yards,  or  a  lot  of  100  articles.  But  the  unit  is 
still  for  a  complete  article,  without  distinction  as  to  cost  of  sep- 
arate parts,  if  any. 

(/)  Unit  is  the  individual  piece  or  part,  or  a  lot  of  say  100 
similar  pieces  or  parts.  (Engineering  cost  type.  No  sub- 
division of  unit  quantity  possible  beyond  this.) 

AMOUNT  OF  DETAIL  IN  COST  OF  UNIT  QUANTITY 

(g)  No  detail.  All  processes  within  the  department  lumped 
together  in  a  single  total. 

(h)  Each  process  costed  separately.  (An  unbroken  series  of 
processes  may  be  grouped  and  considered  as  one  process.) 

It  will  be  seen  from  the  foregoing  that  there  are  no  less  than 
eight  conditions  governing  the  selection  of  a  costing  method. 
In  order  to  make  their  relative  bearing  clearer  they  may  be 
stated  as  follows: 

There  are  three  methods  of  charging  labor  and  expense  to  product. 

There  are  three  degrees  of  subdivision  of  the  unit  quantities  to 
which  cost  is  to  be  applied. 

There  are  two  degrees  of  detail  in  regard  to  the  departmental 
cost  of  whatever  unit  quantity  is  selected. 

The  great  complexity  of  cost  accounting  is  due  to  necessity  of 
selecting  the  most  correct  method  of  charging  labor  and  expense 
and  the  most  appropriate  degree  of  subdivision  of  unit  quantity, 
:uid  of  detail,  in  any  given  set  of  circumstances. 

Expense  Arising  Within  the  Department. — In  practice, 
indirect  material  and  indirect  labor  take  their  rise  partly  within 
the  department  itself.     The  wages  of  laborers  and  cleaners,  and 


CONNECTISd  COST   WITH  PRODUCT  13 

the  cost  of  supplies,  such  as  oil  and  waste,  are  familiar  examples. 
In  the  discussion  of  methods  of  costing  now  about  to  be  entered 
on,  it  will  be  assumed  that  such  items  have  already  been  sep- 
arated from  the  cost  of  direct  production,  and  assembled 
separately. 

By  making  this  assumption  the  necessity  of  describing  the 
mechanism  for  making  this  separation  is  avoided  at  this  stage, 
and  as  it  has  no  significance  whatever  as  regards  the  ultimate 
destination  of  the  indirect  material  and  the  indirect  labor,  there 
is  no  disadvantage  in  omitting  it. 

In  machine  shops  and  engineering  works,  where  the  operative 
labor  is  of  such  a  character  that  it  may  be  used  for  making  re- 
pairs, the  days  work  of  any  operative  may  include  both  direct 
production  and  indirect  labor.  These  must  be  sorted  apart  in 
every  case,  before  anything  else  is  done,  but  after  such  sorting 
is  accomplished  we  have  precisely  the  condition  of  affairs  here 
assumed,  namely,  that  all  direct  labor  is  in  one  account  and  all 
indirect  labor  in  another.  The  mechanism  for  doing  this  does 
not  affect  the  main  argument,  and  acquaintance  with  it  may 
well  be  postponed  until  a  general  acquaintance  with  the  broad 
outline  of  cost  accounting  has  been  made.  It  is  fully  dealt  with 
in  the  second  portion  of  this  work. 


CHAPTER  V 
COSTING  ON  METHOD  A 

The  most  convenient  way  to  attack  the  subject  of  cost 
mechanisms  will  be  by  taking  each  of  the  three  Methods  A, 
B,  and  C  by  which  labor  and  expense  are  connected  with  out- 
put  and   discussing  it   separately.     "We   therefore   begin   with: 

Method  A:  Labor  and  Expense  Merged  and  Averaged. — The 
merging  of  direct  labor  with  expense  is  only  possible  under 
certain  conditions.  If  in  a  department  we  have  several  machines 
a,  a,  a,  a  (Fig.  11),  each  of  which  can  be  used  indifferently  for  making 
the  product,  and  if  the  wages  of  the  operators  of  these  machines 
are  identical,  or  so  very  similar  that  the  difference  may  be  ig- 
nored, then  it  is  obvious  that  any  one  hour  of  operative  labor 


\ 

i 

\ 

/ 

\ 

/ 

\ 

/ 

a 

a 

a 

a 

\ 

f 

\ 

' 

i 

' 

' 

' 

Fig.   11. — A  department  having  four  archives,  each  identical.     Such  a  de- 
partment   is    said    to    have   four    "simple"    streams   of   product. 

is  worth  exactly  the  same  as  any  other  hour,  and  no  object  is  gained 
by  charging  it  as  a  separate  item  to  Product.  In  a  soap-boiling 
room,  for  example,  the  operators  may  be  at  work  now  on 
one  kettle  and  now  on  another,  and  as  long  as  they  are  paid 
day  wages,  it  is  obvious  that  it  is  a  matter  of  indifference  which 
kettle  they  are  working  on.  Similarly  in  an  envelope-folding 
department,  if  we  have  ten  machines  and  say  eight  operatives, 
each  operative  being  assignable  to  any  machine,  and  each  being 
paid  the  same  wages,  then  an  hour's  work  at  any  machine  will 
be  the  same  as  an  hour's  work  at  any  other  machine. 

If  the  work  is  performed  by  gangs  or  groups  of  men,  then  there 
may  be  different  rates  of  wages  within  the  group  (e.g.,  a  foreman), 
but  as  long  as  the  total  wages  of  the  group  are  always  the  same, 
they   may  be  shifted  about  from   one  machine  a  to  another 

44 


COSTING  ON  METHOD  A 


45 


machine  a  just  as  though  they  were  one  man,  without  dis- 
turbing the  principle  that  one  hour's  labor  is  as  good  as  another 
hour's  labor. 

The  principle  may  be  extended  to  cover  cases  where  there  is  a 
slight  difference  of  wages  among  operators,  as  for  instance  where 
length  of  service  is  rewarded  by  increased  wages,  provided  that 
there  is  no  permanent  connection  between  certain  kinds  of  work 
and  certain  duties.  Where  labor  is  fluid,  and  the  work  as  it  comes 
along  is  assignable  to  any  operative,  then  the  conditions  for  merg- 
ing labor  and  expense  exist. 


\ 

/ 

\ 

/ 

v 

a 

a 

a 

b 

b 

b 

c 

c 

c 

d 

d 

d 

' 

' 

' 

' 

' 

r 

Fig.  12. — A  department  having  three  sets  of  four  machines  each.  Each 
series,  a,  b,  c,  d  is  a  continuous  process,  and  identical  with  the  other  two. 
Such  a  department  is  said  to  have  three  compound  streams  of  product. 

When  operatives  are  paid  by  piecework  Method  A  is  inapplic- 
able. 

It  may  happen  that  product  goes  through  a  series  of  processes 
in  the  department,  and  that  each  stage  has  a  different  rate  of 
wages.  Fig.  12  illustrates  a  shop  in  which  product  passes 
through  three  stages  a,  b,  c  and  d.  Now  the  operative  at  a 
may  be  paid  one  rate,  at  b,  another  rate,  and  similarly  for  c 
and  d.  Provided  that  the  total  wages  a  -\-  b  -\-  c  -\-  d  in  each 
series  are  the  same,  then  merging  is  proper.  Or  to  put  it  another 
w&y,  if  all  a  operatives  are  paid  at  one  rate,  all  b  operatives  at 
another,  and  similarly  for  c  and  d  operatives,  and  particularly 
if  all  a  operatives  are  interchangeable,  and  also  all  6,  c  and  d 


46         MANUFACTURING  COSTS  AND  ACCOUNTS 


operatives  are  also  interchangeable  each  in  his  own  class,  the  same 
conditions  exist,  Of  course,  it  is  assumed  that  all  product  follows 
the  entire  series  of  processes  a,  b,  c  and  d,  in  every  case. 


"EAST"  DEPT. 

(  260      260  T 
Depreciation 


Cost    Sheet 


Direct  Mat'l 

Direct  Wages 

Expense: 

Deprec. 

lG.STolbs    Ind. Wages 

@S  Cents  Ind.Mat'l 

Adin.Exp. 


Total 


1X.U 


Manufacturing  or  Cost 
Journal 


Finished  Work. 
Journal 


Dept'l 

Finished  Work 

Account 


Indirect  Material 

x"      Balance  Brought  and  Carried  Forward 
/         ~\     s-''  anJ  Work  in  Process 

(        *\ 

I     60        60     ) 

Share  of 
Admin.  Expenses 

Fig.  13.— Costing  on  Method  A  (single  product).  The  ledger  ac- 
counts on  the  left  are  those  of  the  "East"  Department  in  Fig.  10,  but 
Wages  and  Material  accounts  have  been  further  journalized  into  "Direct" 
and     Indirect. 

A  department  arranged  like  Fig.  11  is  termed  a  shop  having 
four  simple  streams  of  product,  and  one  like  Fig.  12  is  termed  a 
shop  having  three  compound  streams  of  product.     In  the  former 


COSTING  ON  METHOD  A  47 

case  each  machine  a  is  a  producing  unit.     In  the  latter  case 
each  series  of  machines  a,  b,  c  and  d,  forms  a  producing  unit. 

Simple  and  compound  groups  of  machines  cannot  coexist  in 
the  same  department,  nor  can  the  compound  groups  differ 
among  themselves;  otherwise  incorrect  costs  will  result. 

Figure  13  represents  the  ledger  accounts  belonging  to  the 
"East"  Department  (see  Fig.  10)  with  the  exception  that  the 
accounts  for  Materials  and  for  Wages  and  Salaries  have  been 
subdivided  into  Direct  and  Indirect  in  each  case,  for  the  reasons 
just  given.  This  subdivision,  by  the  way,  would  be  made 
through  the  original  journal  entries  in  Fig.  8,  all  the  necessary 
splitting  up  into  departments  and  special  accounts  for  each 
department  being  really  done  at  one  operation.  It  has  been 
thought  better,  however,  to  gradually  develop  the  matter  stage 
by  stage  instead  of  presenting  the  reader  with  a  complex  jour- 
nalization at  the  beginning. 

The  departmental  accounts  shown  in  Fig.  13  may  be  grouped 
as  follows: 

Direct  Material.  Chargeable  direct  to  unit  quantity  of 
product,  as  mentioned  above. 

Direct  Labor. 

Expense  accounts,  viz.: 
Depreciation. 
Indirect  Wages. 
Indirect  Material. 
Administration  Expense. 

We  have  now  to  find  some  way  of  charging  Direct  Labor  and 
Expense  to  Product. 

Single  Product  Costs  on  Whole  Output. — In  this  case  the  unit 
quantity  of  product  is  the  whole  of  the  output.  Of  course,  it  will 
at  once  suggest  itself  that  no  costing  of  the  whole  output  can  be 
made  unless  the  output  is  homogeneous.  If  it  were  made  up  of 
brass  kettles  and  fire-irons,  for  instance,  to  cost  the  output  either 
by  weight,  or  by  number  of  articles,  would  be  meaningless. 

To  cost  an  output  as  a  whole,  it  must  be  homogeneous. 

Such  a  product  would  be  yarn  in  a  spinning  room,  or  envelopes 
of  one  size  and  make  passing  through  an  envelope-folding  de- 
partment by  the  million,  or  soap  in  a  soap-boiling  room,  or  any 
product  which  is  either  continuous  and  possesses  no  parts,  or 
of  which  each  piece  is  like  every  other  piece. 

If  we  have  such  a  product,  we  must  still  have  some  unit  by 


48       MANUFACTURING  COSTS  AND  ACCOUNTS 

which  to  cost  it.  It  must  be  measureablc,  weighable  or  count- 
able. Then  we  can  express  the  whole  product  of  the  department 
for  one  month  as  so  many  thousand  gallons,  yards,  pounds  or 
thousands,  and  then  if  we  divide  the  total  departmental  cost 
by  this  figure,  and  add  Direct  Material,  we  arrive  at  the  depart- 
mental cost  per  gallon,  yard,  pound  or  per  thousand.  It  will 
be  noticed  also,  that  though  not  specifically  mentioned,  a  time 
busts  is  implied.  In  this  case  the  time  basis  is  one  month, 
which  is  the  same  period  of  time  as  covered  by  our  journalizing. 
For  this  reason  the  time  question  does  not  obtrude  itself,  but  it  is 
there  just  the  same,  as  we  shall  see  immediately  that  we  come  to 
consider  the  case  wdien  twro  or  more  products  have  to  be  costed 
on  the  basis  of  the  whole  output  of  each. 

To  ascertain  the  cost  of  a  single  homogeneous  product  for  one 
month  a  Cost  Sheet  is  made  out  as  follows: 


Cost  of  direct  material $300  22  per  cent. 

Cost  of  manufacture,  viz.: 

Direct  wages 540  40  per  cent. 

Expense,  viz.: 

Depreciation 260  1934  per  cent. 

Indirect  wages 120  9  per  cent. 

Indirect  material 70  5^  per  cent. 

Administration  expenses 60  4>£  per  cent. 

Total  cost  of  product $1,350  100  per  cent. 

Divide  by  quantity  made,  viz.,  16,875  lb.;  Cost  per  pound,  8  cts. 

Note. — Frequently  each  of  the  components  of  cost  is  expressed  as  a 
per  cent,  of  total  cost  per  pound  as  well  as  in  money.  This  is  for  con- 
venience in  comparing  monthly  figures. 

In  many  cases,  of  course,  there  would  be  no  direct  material 
to  be  considered  in  the  work  of  a  department.  In  the  case  of  an 
envelope-folding  department,  for  example,  the  department 
would  receive  the  blanks  already  cut  to  shape  and  gummed,  and 
the  cost  of  its  operations  would  merely  be  a  process  cost.  But 
this  process  cost  would,  just  the  same,  be  expressed  as  cost  of 
folding  envelopes  per  1,000.  Whether  or  not  direct  material 
eni  era  into  the  work  of  the  department  makes  no  difference  what- 
ever in  the  method  of  costing.  The  form  of  the  above  Cost 
account,  for  instance,  would  be  just  the  same,  omitting  the  first 
line.  The  cost  would  be  expressed  per  pound  of  the  quantity 
handled. 


COSTING  ON  METHOD  A  49 

This  Cost  account  is  now  made  the  source  for  crediting  the 
departmental  cost  element  accounts,  and  charging  the  depart- 
mental Manufacturing  account.  A  Cost  or  Manufacturing  Jour- 
nal is  made  use  of,  as  shown  in  Fig.  13.  It  will  be  noticed  that 
there  is  already  a  balance  standing  to  the  debit  of  Manufactur- 
ing account.  This  represents  work  in  process  carried  forward 
monthly,  and  it  is  assumed  that  this  balance  remains  constant 
from  month  to  month.  In  some  cases  no  balance  remains, 
a  machine  printing  shop,  for  example,  or  other  shops  doing 
process  work  only,  no  direct  material  being  charged  to  Cost. 

Only  one  more  step  is  necessary  and  that  is  the  crediting  of 
Manufacturing  account  and  the  charging  of  Finished  Work 
account  with  the  value  of  product  delivered  to  the  next  depart- 
ment or  to  warehouse.  The  Finished  Work  Journal  takes  care 
of  this.  The  total  in  it  is  necessarily,  in  this  case,  the  same 
as  that  in  the  Manufacturing  Journal,  because  the  month's 
product  is  dealt  with  as  a  whole.  Fig.  13  shows  the  course  of 
the  entries.  The  costing  operations  are  now  complete  for  the 
month. 

This  is  the  simplest  kind  of  cost  keeping  possible.  It  is 
limited  in  application  to  the  conditions  mentioned,  namely 
a  homogeneous  product,  passing  regularly  through  exactly  the 
same  operations  every  time. 

Two  or  More  Products  Costed  on  the  Whole  Output  of  Each. — 
If  there  are  two  or  more  kinds  of  product,  each  going  through 
exactly  the  same  steps  of  manufacture,  the  total  cost  of  each 
will  be  proportionate  to  the  output  of  each,  provided  that  the 
rate  of  production  of  each  kind  is  strictly  the  same.  If  one 
kind  takes  longer  than  another  to  pass  through  the  series  of 
operations  in  the  shop  then  the  cost  of  each  kind  will  not  be 
proportionate  to  output. 

This  is  so  important  a  point  that  it  must  be  thoroughly  under- 
stood. All  costing  is  based  on  a  measurement  of  time.  In  the 
simplest  case  above  mentioned,  when  we  assemble  the  elements 
of  cost  (excluding  material  entering  into  product),  what  we  have 
really  assembled  is  the  cost  of  manufacturing  capacity  for  a 
certain  period  of  time,  actually  a  month.  Another  way  of 
expressing  the  same  fact  is  by  saying  that  it  is  the  cost  of  manu- 
facturing capacity  for  200  hr.  (if  we  assume  that  there  are  200 
hr.  in  the  working  month)  multiplied  by  the  number  of  streams 


50       MANUFACTURING  COSTS  AND  ACCOUNTS 

of  product  going  through  the  shop.1  From  this  it  follows  that 
every  hour  of  this  manufacturing  capacity  has  its  price.  If  we 
are  dealing  with  a  single  uniform  product,  we  may  safely  assume 
that  one  hour's  production  is  like  another  hour's  production, 
or  at  any  rate  if  it  is  not  it  should  be.  We  could,  therefore, 
have  expressed  our  cost  in  the  example  just  given  in  this  form: 

Total  cost  of  department,  81,050 

Hours  in  month,  200  X  10  streams  of  product,  2,000  hr. 

Cost  per  process-hour,  52>£  cts. 

Total  process-hours  on  product,  2,000 

Cost  of  product,  2,000  X  52  J  £  cts $1,050 

Add  direct  material 300 

81,350 
Cost  per  pound  (10,875  lb.) 8  cts. 

This,  of  course,  would  be  a  roundabout  way  of  arriving  at  the 
cost  compared  with  the  other  method,  yet  it  has  a  practical  value 
for  estimating  purposes.  If  we  know  the  cost  of  the  hour's 
work  of  a  machine  or  series  of  machines  (stream  of  product) 
and  can  estimate  how  many  hours'  work  are  involved  in  a  job 
on  which  we  are  bidding,  we  obtain  a  close  figure.  A  modi- 
fication of  such  a  method  is  widely  used  in  the  printing  trade. 

Now  if  we  have,  not  one  uniform  product,  but  two  or  more 
similar  but  not  identical  products,  we  cannot  say  that  1,000 
lb.  of  A  and  500  lbs.  of  B  have  cost  $100  and  $50  respectively 
out  of  a  total  cost  of  $150,  for  1,500  hr.  work,  unless  we  are  sure 
that  A  actually  took  1,000  hr.  and  B  500  hr.  For  if  we  were  to 
find  afterwards  that  A  took  1,200  hr.  and  B  300  hr.,  then  the 
actual  cost  of  A  would  have  been  $120  and  of  B  $30.  Yet  this 
method  of  basing  cost  on  proportional  output  is  not  uncommon, 
although  it  is  utterly  erroneous  save  in  the  exceptional  case 
that  the  time  occupied  is  in  exact  proportion  to  the  output 
of  each. 

When  there  are  two  or  more  products,  therefore,  passing 
the  same  shop,  the  question  of  time  recording  comes  into  play 
save  in  the  few  instances  where  we  are  sure  that  each  product 
has  the  same  rate  of  production  as  any  other.  A  concrete 
case  would  be  the  envelope-folding  department  of  a  stationery 

1  By  "streams  of  product"  is  meant  the  series  of  processes  followed  by 
the  product.  Two  or  more  such  streams  may  be  proceeding  simultaneously, 
see  Fig.  12. 


COSTING  ON  METHOD  A  51 

works.  Here  we  have  a  number  of  machines  of  about  the  same 
character,  operated  by  girls  of  about  the  same  skill  and  wage, 
and  although  any  machine  could  not  be  used  for  any  job,  the 
rate  of  production  and  the  operating  cost  of  all  machines  in- 
cluding operator  is  much  the  same.  If  now  we  have,  during 
a  month,  20  different  kinds  of  envelopes  to  fold,  in  lots  varying 
from  1,000  to  50,000  substantially  exact  costing  will  be  found 
by  ascertaining  the  cost  of  a  process-hour,  and  recording  the 
total  number  of  hours  worked  on  each  kind  of  envelope  by  all 
the  machines. 

The  process-hour  in  this  case  is  the  individual  machine-hour, 
since  each  machine  completes  the  whole  process  (compare  Fig. 
11).  The  total  number  of  hours  worked  by  all  machines  is, 
therefore,  divided  into  the  total  cost  of  running  the  department, 
including  direct  labor,  and  the  resulting  figure  is  obviously  the 
cost  of  one  hour's  work  of  one  machine. 

If,  on  the  other  hand,  the  process  work  done  on  the  envelopes 
were  accomplished  by  sets  (of  say  three  machines)  then  we  should 
treat  three  machines  as  one  producing  unit  (compare  Fig.  12). 
Thus  if  the  department  contained  30  machines,  each  of  which 
accomplished  the  whole  process,  then  the  monthly  cost  of  run- 
ning the  department  would  be  divided  by  30.  But  if  the  30 
machines  were  arranged  in  10  groups  of  three  machines,  and 
each  envelope  had  to  pass  through  a  set  of  three  machines  before 
it  was  finished,  then  the  cost  of  running  the  department  would 
be  divided  by  10.  Using  the  phrase  adopted  above,  we  might 
say  that  in  the  former  case  there  were  30  simple  streams  of 
product  passing  through  the  shop,  and  in  the  latter  case  10 
compound  streams.  It  is  the  number  of  distinct  groups  of 
processes,  of  streams  of  product,  not  the  actual  number  of 
machines,  that  is  the  divisor. 

In  costing  several  products  on  Method  A,  the  necessity  for 
recording  what  proportion  of  the  total  working  time  of  the  depart- 
ment has  been  taken  up  by  each  product,  and  the  corresponding 
necessity  for  calculating,  first  the  cost  of  the  process-hour, 
and  then  the  cost  of  the  output  of  each  product  separately, 
makes  the  use  of  additional  mechanism  necessary.  Fig.  14 
shows  this  mechanism  developed  from  Fig.  13,  but  carried  in  this 
instance  to  the  point  of  making  separate  charges  to  Finished 
Work  for  three  separate  products,  called  X,  Y,  and  Z. 

The  Time  Record  summarizes  the  work  of  the  various  machines, 


52       MANUFACTURING  COSTS  AND  ACCOUNTS 

and  groups  the  process-hours  worked  on  X,  Y,  and  Z,  showing 
totals  of  1,000,  400  and  GOO  hr.  respectively,  out  of  a  depart- 
mental total  of  2,000  process-hours.  Each  of  these  totals  for 
X,  Y,  and  Z  is  entered  on  the  Cost  Sheets,  of  which  there  is  one 


Time  Record 


Cost  of  Process  Hour 


Tutal 

Hrs. 

X 

11 

z 

Hrs  or 

Prod  X 

1000 

1000 

V 

400 

wo 

e 

COO 

GOO 

Totals 

2000 

1000 

too 

COO 

Direct  Labor 
Expense:— 


2000  Hrs. 
=  5h'Cts, 


Depreciation 
Ind. Wages 
Ind.Mat'l 
Admin. Exp. 


Total 


Cost  Sheet 


Cost  Sheet 


Cost  Sheet 


Prod,  x 
Direct  Mat'l 

1000  HrsfgJi^Ct's. 

150 
525 

|8«7Lbs.=  8Cts.| 

Total  Cost 

G75 

Prod,  y 
Direct  Mat'l 

400Hrs(J?!52?^C'ts. 

75 
210 

|l218Lbs.  =  6?iCts.| 

Total  Cost 

2b5 

Prod,  z 
Direct  Mat'l 

600Hr6@52M'Cts. 

75 

315 

[4210Lbs.=  9KCts.j 

Total  Cost 

380 

Manufacturing  Cost  Journal 


Finished  Work  Journal 


'east"  DEPT 

(260  260  ] 
Depreciation 
(  540     540    J 

Direct   \\  ayes 

(  120       120  j 

Ind.  ffases 

(  300  300  ) 
Direct  Mat'l 
(70  70  ) 
Indirect  Mat'l 

(60       60    ] 

vi> 

Share  of  Adinin 
Expense 

Balance  ol 
Work  in  Process 

Dept. Manufacturing 
Accounts 

Fig.  1  L— Costing  on  Method  A  (two  or  more  products).  Total  depart- 
mental cost  divided  between  products  in  ratio  of  Time  occupied  by  each. 
This  gives  throe  different  rates  per  lb.  Simple  division  of  total  costs  by  respec- 
tive weights  of  products  would  give  false  costs  in  this  case. 

for  each  product.     The  departmental  total  of  2,000  hr.  is  entered 
on  the  Cost  of  "Process-hour"  Sheet. 

On  this  latter  sheet  are  then  entered  all  the  components  of 
cosl  which  are  chargeable  to  the  department  except  direct  ma- 
terial.    ( I  >irect  material  is  often  entered  direct  on  separate  Cost 


Musi 
Agree 

ivith 

Total  of 

Cost 

BheetsX 

o 
H 

— 
3 

> 

T3 

Q 

3 

T3 

p, 
a 

*T350 

260 

5 10 

121.1 

300 

70 

CO 

1        j      i      i      i      i      I 
I      I      I      I      < 

I J ! I ! L_J 


Dept.Finished  Work  Accounts 


COSTING  ON  METHOD  A  53 

Sheets.)  The  total  of  departmental  cost  thus  found,  $1,050, 
is  then  divided  by  the  total  process-hours,  as  shown  by  Time  Re- 
cord, and  the  result  is  the  cost  of  a  process-hour,  viz.,  hx/±  cts. 
This  figure  is  then  entered  on  the  cost  sheets,  so  that  the  value 
of  time  on  each  product  can  be  extended. 

One  Cost  Sheet  is  used  for  each  separate  product.  On  it  are 
entered,  first  the  cost  of  direct  material;  secondly,  the  process- 
hours  on  the  product,  from  Time  Record,  and  the  cost  of  process- 
hour,  from  the  other  sheet.  The  extension  is  then  made,  showing 
$525  for  product  X;  $210  for  F;  and  $315  for  Z.  Each  sheet 
is  then  totalled,  so  as  to  show  total  cost  of  the  whole  amount  of 
product.  This  total  cost  is  then  divided  by  the  weight  in 
pounds  of  the  output  (or  yards,  gallons,  thousands,  etc.)  giving 
the  cost  per  pound. 

The  total  of  all  the  cost  sheets  together  must  agree  with  the 
Cost  Journal  total,  from  which  debits  and  credits  are  made 
exactly  as  in  Fig.  13. 

In  order  to  clear  Manufacturing  account,  and  to  charge  the 
Finished  Work  accounts  for  products  X,  Y,  and  Z,  respectively, 
the  total  cost  of  each  is  entered  in  the  Finished  Work  Journal  and 
allocated  to  the  proper  column.  Manufacturing  account  is  then 
credited  and  Product  X  account  charged  with  its  total,  and 
the  same  with  the  other  product  accounts. 

Study  of  Fig.  14  will  enable  all  these  changes  to  be  understood 
without  effort.  In  this  diagram,  however,  a  slightly  different 
method  of  showing  the  credits  and  charges  made  from  the 
journals  is  employed.  Instead  of  a  line  being  drawn  from  each 
column  of  the  journal  to  the  corresponding  ledger  account,  all 
credits  are  consolidated  in  one  dotted  line,  and  charges  in  one 
solid  line  for  each  journal.  These  branch  off  afterward  to  the 
respective  ledger  accounts.  This  method  is  used  to  avoid  the 
multiplicity  of  lines  otherwise  necessary,  and  will  readily  be 
understood  by  the  reader  who  has  followed  the  detailed  method 
used  in  previous  diagrams. 

Attention  may  be  drawn  to  the  fact  that  in  the  example 
given,  an  attempt  to  find  the  separate  cost  of  each  of  three  prod- 
ucts by  simply  dividing  departmental  cost  among  them  in  pro- 
portion to  output  of  each  would  give  rise  to  false  figures.  The  main 
product  X  will  be  seen  to  have  the  same  cost  per  pound  as  the 
whole  product  in  Fig.  13.  But  the  products  X  and  Z  are  re- 
spectively higher  and  lower  than  the  average  price  of  8  cts., 


54        MANUFACTURING  COSTS  AND  ACCOUNTS 

which  would  be  forthcoming  if  cost  were  taken  out  on  the 
proportionate  basis.     This  is  because  the  rate  of  production  of 

Y  and  Z,  instead  of  being  the  same  as  that  of  X,  wras  in  fact 
respectively  slowrer  and  faster.  This  has  resulted  in  a  difference 
of  cost  per  pound  as  between  the  three  products  amounting  to  a 
considerable  divergence  from  average  cost.     While  X  is  8  cts., 

Y  falls  to  6%  cts.  and  Z  rises  to  9J4  cts. 

Costing  by  Lots  on  Method  A. — This  is  really  an  inversion  of 
the  last  method.  Instead  of  taking  a  wThole  month's  product 
and  then  ascertaining  the  weight  cr  quantity  of  it,  w^e  specify  the 
weight  or  quantity,  and  ascertain  how  long  it  has  taken  to  make 
it.  The  first  step  is  to  ascertain  the  cost  of  the  process-hour, 
as  in  the  example,  Fig.  14.  But  the  time  record,  instead  of  taking 
note  simply  of  differences  in  product,  must  concern  itself  with 
differences  in  lots.  This  implies  that  the  lots  must  be  identified 
in  some  way  and  this  requirement  brings  us  to  a  new  and  very 
important  part  of  the    mechanism  of  costing,  namely,  orders. 

Orders  are  the  mechanism  by  which  cost  is  grouped  with 
particular  items  or  lots  of  product.  In  the  two  cases  just  de- 
scribed orders  are  unnecessary,  but  they  might  be  used,  and  in 
fact  the  scope  of  orders  may  be  best  understood  if  we  begin  with 
simple  cases  like  these. 

Where  we  have  onfy  one  product,  which  we  cost  every  month, 
we  might  charge  the  monthly  total  to  an  order  number.  If, 
for  example,  each  month's  production  received  a  separate  order 
number,  and  the  Cost  Sheet  on  Fig.  13  were  to  be  headed  with 
such  a  number,  then  on  filing  such  cost  sheets  numerically, 
any  month's  production  could  be  referred  to  by  the  order  number. 
Instead  of  asking  for  costs  for  June,  1915,  we  might  ask  for  the 
cost  of  Order  No.  84. 

Where  two  or  more  products  are  in  question,  each  product 
might  have  its  own  series  of  orders,  such  as  A'84,  F84,  Z84,  etc. 
In  such  a  case  each  of  the  cost  sheets  shown  on  Fig.  14  would  be 
headed  by  its  appropriate  order  number.  The  Time  Record, 
instead  of  recording  time  by  the  name  of  the  product,  would  then 
record  it  by  the  order  number  representing  each  product  for  the 
current   month. 

These  possible  instances  are  given  to  show  that  order  numbers 
can  be  made  to  represent  cither  the  whole  output  for  a  period,  or 
the  whole  of  several  different  outputs.  We  have  now  to  con- 
sider the  case  of  less  than  a  whole  output,  i.e.,  instead  of  having 


COSTING  ON  METHOD  A  55 

only  one  order  per  month,  we  may  have  several,  each  represent- 
ing definite  quantities  of  the  total  product. 

The  introduction  of  orders  also  produces  a  fresh  complication 
in  that,  instead  of  each  month's  output  being  costed  without  re- 
mainder, it  will  generally  happen  that  some  orders  will  be  un- 
finished at  the  month  end. 

To  begin  with,  the  case  of  a  department  manufacturing  a  single 
kind  of  product  may  be  considered.  Orders  may  be  issued  for 
lots  of  product,  based  either  on  weights,  quantities,  numbers,  etc. 
In  shoe  factories  lots  of  two,  three  or  four  dozen  pairs  are  not 
uncommon.  But  orders  may  vary  from  single  articles  to  any 
number  in  a  lot. 

The  mechanism  is  exactly  the  same  as  that  shown  in  Fig.  14, 
except  that  all  charging  is  now  to  order  numbers.  If  the  differ- 
ent products  X,  Y,  and  Z,  in  Fig.  14  are  considered  as  different 
quantities  of  the  same  product,  the  cost  sheets  will  show  the 
cost  of  each  lot.  There  will  be,  of  course,  just  as  many  cost  sheets 
as  there  are  order  numbers,  and  the  totals  on  them  must  agree 
with  the  total  in  the  Cost  Journals  by  means  of  which  the  credits 
to  the  cost  components  accounts  and  the  charge  to  Manufactur- 
ing account  are  made. 

Only  completed  orders  are  entered  on  the  Finished  Work  Journal. 
The  total  in  this  journal  is  then  credited  to  Manufacturing  ac- 
count and  charged  to  Finished  Work  account.  Since  only 
completed  orders  are  thus  entered,  it  is  obvious  that  the  credit 
to  Manufacturing  account  will  not  agree  with  the  charge  to 
that  account.  This  implies  that  a  balance  will  always  stand 
in  that  account,  and  this  balance  will  vary  from  month  to  month. 
Such  balance  represents,  of  course,  the  work  done  on  orders 
which  have  not  yet  been  completed  and  entered  to  Finished 
Goods  Journal. 

Costing  by  Individual  Parts  on  Method  A. — Practically,  this 
case  never  occurs.  Method  A  is  usually  applied  to  homogeneous 
products,  which  can  be  divided  by  quantity  or  number  so  as  to 
allow  of  orders  for  specific  lots,  but  such  a  product  rarely  has 
component  parts  capable  of  individual  costing.  Nevertheless, 
if  required,  an  order  could  be  issued  for  a  single  part,  if  such 
existed,  and  the  separate  cost  of  such  a  part  thus  obtained. 


CHAPTER  VI 
COSTING  ON  METHOD  B 

Whenever  degrees  of  skill  exist  as  between  individual  opera- 
tives, recognized  by  differences  in  wages,  or  where  piecework 
or  bonus  methods  of  renumeration  are  in  vogue,  then  Method 
A  cannot  be  applied,  since  it  is  based  on  the  idea  that  any- 
operative  is  interchangeable  with  any  other  operative,  of  the 
same  duty,  for  all  accounting  purposes.  When,  therefore, 
we  have  different  rates  of  wages  for  doing  the  same  class  of  work, 
or  what  is  the  same  thing,  unequal  earnings  in  the  same  time 
owing  to  the  introduction  of  piecework  or  bonus,  then  it  becomes 
necessary  to  make  a  new  treatment  of  the  components  of  cost, 
as  follows: 

Direct  material.     Charged  direct  to  order  number. 

Direct  labor.     Charged  direct  to  order  number. 

Expense.     Charged  to  order  number  either  by: 

1.  Averaging  it  and  charging  to  Orders  in  proportion  to  direct 
labor  or  labor  hours,  or  by: 

2.  Connecting  it  with  the  use  of  machines  and  charging  to 
Orders  by  an  hourly  rate. 

It  is  the  first  of  these  methods  of  dealing  with  expense  that  is 
the  peculiar  feature  of  Method  B,  which  we  shall  now  discuss. 

Method  B  :  Direct  Labor  Charged  to  Order,  Expense  Averaged 
and  Charged  in  Proportion  to  Direct  Labor. — This  method, 
which  is  the  most  widespread  of  all  methods  of  costing,  has  the 
disadvantage  of  being  exceedingly  incorrect  save  in  particular 
circumstances.  The  only  case  in  which  the  averaging  of  expense 
by  means  of  percentages  is  correct  is  when  all  the  machines  are 
of  the  same  cost,  occupy  the  same  space,  take  about  the  same 
power,  entail  about  the  same  supervision,  make  about  the  same 
call  on  the  shop  transport  service  (cranes,  handling,  etc.). 
These  conditions  do  exist  in  the  case  of  departments  such  as 
those  described  under  Method  A,  where  any  machine  or  group 
of  machines  can  be  used  indifferently  for  product,  but  as  soon 
as  machines   begin   to   differ   among  themselves,   the    method 

56 


COSTING  ON  METHOD  B  57 

now  to  be  described  is  only  approximate.  It  correctly  records 
direct  material  and  direct  labor  against  each  order,  but  it  only 
correctly  records  expense  against  each  order  when  machines  are 
all  about  the  same  size,  cost  and  character.  If  expense  is  very 
small  compared  with  labor  and  material  then  no  great  harm 
is  done,  but  unfortunately,  this  method,  on  account  of  its 
"simplicity"  is  commonly  applied  in  shops  where  expense  may 
be  anywhere  from  90  to  150 per  cent,  of  direct  wages,  to  the  great 
detriment  of  true  results. 

It  has  two  varieties :  one  in  which  expense  is  charged  to  Orders 
in  proportion  to  the  amount  of  direct  wages  on  each;  the  other,, 
supposed  to  be  more  accurate,  but  really  not  much  more  so 
save  under  special  conditions,  charges  expense  to  Orders  on  the 
basis  of  the  number  of  direct  labor  hours  on  each. 

The  form  in  which  results  are  obtained,  i.e.,  whether  by  the 
whole  output  of  each  of  several  products,  or  by  lots  of  individual 
articles,  depends  upon  the  manner  in  which  orders  are  made 
out.  Two  or  more  separate  kinds  of  product  can  be  costed 
as  a  whole,  by  issuing  one  order  for  each  class  of  product.  Thus 
if  we  are  making  brass  kettles  and  candlesticks,  an  order  would 
be  issued  for  the  monthly  output  of  kettles  and  one  for  the 
monthly  output  of  candlesticks.  But  where  Method  B  is  in  use, 
it  is  more  usual  to  issue  orders  for  definite  lots,  say  for  lots  of 
100  kettles  and  200  candlesticks.  It  is  also  possible  to  treat 
one  or  more  products  as  a  whole,  and  other  products  by  lots. 
Thus  in  addition  to  having  orders  running  for  100  kettles  and 
200  candlesticks  we  might  have  another  order  running  for  the 
whole  month's  output  of  fire-irons.  In  the  latter  case,  of  course, 
the  number  of  articles  actually  produced  in  the  month  would 
have  to  be  ascertained  and  used  as  the  basis  for  ascertaining 
their  cost  per  hundred  or  per  pound,  whichever  way  we  desired 
to  express  the  cost. 

By  the  plan  of  charging  costs  to  order  numbers,  we  may  in 
fact,  obtain  costs  of  any  quantity  of  any  product,  such  quantity 
varying  from  the  whole  month's  output  of  one  product,  down 
to  lots  of  any  quantity,  even  a  single  article.  But  it  should 
be  remembered  that  if  an  order  is  made  out  to  cost  the  whole 
output  of  a  product,  or  for  very  large  lots  which  may  require 
the  whole  month  or  even  more  than  a  month  to  complete,  no 
light  is  shown  on  any  intermediate  variations  in  the  cost  of 
production,   nor,  in  practice,   can  such  information   be  subse- 


58        MANUFACTURING  COSTS  AND  ACCOUNTS 

quently  obtained.  By  making  out  orders  for  small  lots,  the 
cost  of  one  such  lot  can  be  compared  with  the  cost  of  a  similar 
lot  made  at  another  time,  and  thus  a  close  control  over  the 
efficiency  of  production  maintained. 


Expense  or  Burden  Journal 


D. Labor 

c 

_• 

a 

540 

- 

d 

60 

d 

rt 

H 

Expense 

o 

o> 

£ 

3 

a 

96H% 

d 

- 

a 

M 

<i 

510 

260 

120 

70 

CO 

1ATN 

I   510     510  J 

vlx 

i 

Dept'l        I 
Expense      I 


Cost  Sheet 


Operators  Time  Record  of 
Process  Hours  and  Wages 


r 


Order 

371 

etc 

10100 
ISO 

UOilSOP 

r 


Ordei 
372 
etc 

1 
20 

W. 
ISO 

Time  Charges  to  Order  Numbers  are 
Posted  to  Cost  Sheets 


J 


Cost  Sheet 


No.37l]ltem 

\Y. 

B. 

u. 

D.ilatl    50 

50 

D.LabotlOO 

100 

Exp.  i 

76%  ) 

94 

94 

Total 

244 

1.JU 

yi 

50 

No.372[ltem 

\v. 

E. 

M. 

D/Matl.    60 

GO 

D.LabdrlJO 

150 

Exp.  J   142 
76%! 

142 

Total 

352 

150 

112 

GO 

Cost  Sheet  Listed  In  Cost  Journal 


Manufacturing  Cost  Journal 


Finished  Work  Journal 


Direct  Mat' 


Ind.Mat'l. 


7) 

,_• 

o 

o 

c. 

A 

£ 

a 

a 

AS 

43 

0, 

d^ 

u 

w 

O 

O 

A 

H 

371 

100 

9"4 

50 

372 

150 

142 

60 

352 

Others  not 

290 

274 

190 

754 

Total 

540 

510 

300 

1350 



._L_ 

J_ 

_l 

Finished 

Cost  Sheet 

Listed 


o 

o 

a 

'A 

•a 

o 

n 

a 
o 

a 

(4 

■3U 

A 

tal 

5 

o 
H 

371 

100 

94 

50 

244 

Others  not 

330 

310 

200 

shown 

Total 

430 

404 

250 

10S4 

Balance 
Brought 
Forward 

Dept.  Mfg._Acc.t 


^Balance  to 
Next  Month 
Note:    Some  orders  will 
be  unfinihscd  at  month  end 
and  remain  In  llfg.  acct. 
complete.  -  Dept.  Fin.  Work  Acct. 


I  1084  I 

»d    V  J 

.until    ^-—1 


Fig. 


—Costing  on  Method  B.     Direct  labor  charged  to  order  numbers. 
Expense  averaged  and  pro-rated  over  Direct  labor. 

Note:  An  order  number  may  represent  the  whole  output  of  one  product, 
or  definite  lots  or  quantities  of  product. 


For  the  purposes  of  the  accountant,  the  larger  the  quantities 
of  product  dealt  with  in  one  order  the  simpler  and  easier  is 
his  work.  But  the  manufacturer  uses  costs  for  other  purposes 
than  accounting,  and  control  of  efficiency  is  one  of  them.     The 


COSTING  ON  METHOD  B  50 

selection  of  the  unit  quantity,  and  therefore  the  form  of  order, 
is  not  a  matter  which  rests  wholly  with  the  accountant.  On  the 
other  hand,  the  device  of  issuing  lot  orders  is  indicated  whenever 
the  lots  vary  slightly  among  themselves,  as  for  example  in  lots 
of  shoes  or  of  switch  parts,  each  lot  representing  a  special  pattern 
slightly  differing  from  the  previous  one,  or  from  the  standard 
pattern  made  in  bulk  on  a  whole  product  order. 

However  the  orders  are  subdivided  into  lots  the  important 
point  to  observe  is  that  the  whole  field  of  production  in  any 
department  is  occupied  by  work  on  orders  of  one  kind  or  other. 
This  being  the  case,  it  follows  that  under  Method  B,  where  opera- 
tive labor  is  charged  direct  to  order  numbers,  each  operative 
will  have  to  charge  all  of  his  time  to  one  or  more  orders.  In  Fig. 
15,  therefore,  which  exhibits  the  method  of  costing  on  Method 
B,  the  first  stage  is  that  of  the  operatives'  Time  Sheets,  on  which 
the  whole  of  his  working  time  is  allocated  to  one  or  other  of 
the  various  orders  running  in  the  department.  This  time, 
when  extended  into  money  value,  is  posted  to  the  corresponding 
Cost  Sheets,  each  of  which  represents  a  single  order  number. 

Direct  material  used  on  an  order  is  also  posted  to  the  corre- 
sponding Cost  Sheet.  We  have  then  all  the  components  of  the 
cost  of  each  order,  except  expense. 

Expense,  it  will  be  remembered,  is  aggregated  and  charged 
to  order  numbers  either  as  a  percentage  on  direct  labor  or 
as  an  hourly  charge  for  each  process-hour.  Before  this  can  be 
done,  the  whole  amount  of  expense  must  be  ascertained,  and 
its  ratio  to  the  whole  amount  of  operatives'  wages  (i.e.  direct 
labor)  worked  out.  Or  if  the  hourly  plan  is  to  be  followed, 
the  total  number  of  process-hours  worked  must  be  found,  and 
divided  into  the  expense  total  in  order  to  ascertain  the  hourly 
"burden." 

The  Expense  or  Burden  Journal  serves  to  collect  expense  into 
one  total  and  also  to  credit  Depreciation,  Indirect  Wages,  Indirect 
Material,  and  other  departmental  expense  ledger  accounts.  The 
total  is  charged  to  a  new  account,  viz.,  Departmental  Expense 
or  Burden.  It  is  the  total  now  standing  to  the  debit  of  this 
latter  account  that  has  to  be  prorated  over  direct  labor  or 
charged  to  costs  on  the  basis  of  an  hourly  burden  rate. 

To  ascertain  the  amount  of  direct  labor  or  of  process-hours  in 
the  Cost  Sheets,  they  are  listed  in  series.  This  is  conveniently 
done  in  the  Manufacturing  Cost  Journal,  since  we  shall  then  be 


60        MANUFACTURING  COSTS  AND  ACCOUNTS 

able  to  use  the  totals  for  charging  and  crediting  ledger  accounts 
as  well  as  prorating  expense.  The  particulars  entered  areas 
follows: 

Order  No.  Direct  Wages.  Expense.  Direct  Mail.  Total.  The 
column  headed  expense  is  left  blank  at  first  entry,  since  we 
have  as  yet  nothing  to  put  in  it.  When  all  the  Cost  Sheets  have 
been  entered  and  the  wages  column  totaled  and  agreed  with  the 
balance  in  the  Direct  Wages  ledger  account,  and  when  the  same 
has  been  done  for  direct  material,  we  are  then  ready  to  fill  out 
the  blank  expense  column  by  calculating  what  portion  of  expense 
is  chargeable  against  each  order  number. 

As  the  total  of  expense  in  §510  and  the  total  of  direct  wages  is 
$540,  this  can  be  expressed  by  saying  that  expense  is  943^ 
per  cent,  of  direct  wages.  Consequently,  if  we  take  the  first 
entry  shown,  namely  Order  No.  371  with  a  direct  wages  charge 
of  §100,  then  we  ma}' enter  the  blank  expense  column  with  94}^ 
per  cent,  of  this,  or  say  $94,  as  the  amount  of  expense  properly 
chargeable  against  Order  371.  The  next  entry  is  Order  372, 
with  a  direct  labor  charge  of  $150.  94^  per  cent,  of  this  is 
$142,  which  we  accordinglyenter  as  the  expense  charge  against 
( >rder  371.     And  so  with  the  remaining  orders. 

When  all  the  order  numbers  have  been  thus  treated,  the 
total  of  the  expense  column  will  be  $510,  or  in  other  words,  all 
the  expense  will  have  been  successfully  prorated  over  direct 
wages  on  orders. 

The  Cost  Journal  being  now  totaled  up,  postings  to  ledger 
accounts  may  be  made.  Credits  are:  Direct  Wages  $540, 
Departmental  Expense  $510,  Direct  Material  $300;  while 
on  the  other  hand,  a  charge  is  made  to  Departmental  Manu- 
facturing account  of  $1,350,  which  represents  the  total  depart- 
mental cost  of  all  the  orders  for  the  month,  including  direct 
wages,  direct  material,  and  each  order's  percentage  of  the 
expense. 

It  will  be  noticed  that  the  effect  of  all  these  operations,  namely 
a  charge  to  Manufacturing  account  of  $1,350  is  precisely  the  same 
as  was  obtained  in  Fig.  14.  Commencing  writh  the  same  cost 
elements  we  have  arrived  at  the  same  results.  This  is,  of  course, 
inevitable,  since  SI, 350  represents  the  total  work  of  the  depart- 
ment in  producing  goods.  But,  on  the  other  hand,  the  manner 
in  which  this  total  is  divided  among  the  cost  accounts  is  wholly 
different.     In  the  former  case  material  was  charged  direct,  and 


COSTING  ON  METHOD  B  61 

all  wages  and  other  expenses  merged  in  one  total  and  charged 
out  to  Orders  on  a  basis  of  the  cost  of  a  process-hour.  In  the 
latter  case  material  is  also  charged  direct,  but  so  are  direct 
wages,  and  the  remaining  expense  is  charged  in  proportion  to 
wages. 

Costs  of  a  particular  order  under  these  two  methods  (A  and  B) 
will  be  the  same  only  if  the  amount  of  wages  earned  by  the 
operative  in  1  hr.  are  equal,  as  well  as  the  number  of  hours. 
The  average  value  of  an  hour  was  shown  to  be  about  5^4  cts. 
on  Method  A,  and  this  remains  the  same  on  Method  B,  though 
now  split  up  into  two  parts,  viz. :  the  hour  of  direct  wages,  and  the 
hour  of  expense;  but  these  two  together  necessarily  make  up 
the  total  hour  at  5}^  cts.  as  before.  But  we  must  now  suppose 
that  a  certain  order  was  worked  on  piecework.  In  this  case  the 
hour  of  direct  wages  would  no  longer  be  worth  only  2.7  cts., 
but  perhaps  3  or  3^  cts.,  and  as  expense  is  prorated  in  pro- 
portion to  direct  wages,  then  the  rate  of  expense  per  hour  would, 
for  that  order,  rise  also.  The  same  would  happen  if  instead  of 
all  operatives  doing  the  same  class  of  work  being  paid  alike, 
there  existed  different  degrees  of  skill  among  them,  which  differ- 
ences of  skill  were  recognized  by  differences  in  wage  rates.  An 
hour's  work  of  the  higher-paid  operative  would  cost  more  than 
2.7  cts.,  and  on  the  other  hand  some  of  the  operatives  would 
probably  be  below  the  former  average  and  their  hour's  work 
would  cost  less  than  2.7  cts. 

All  this  can  be  summed  up  by  saying  that  though  in  the 
instances  exhibited,  the  total  output  of  the  shop  has  cost  the  same, 
yet  as  regards  individual  orders  some  are  above  and  some  below 
the  cost  found  by  Method  A,  simply  because  that  was  an  average 
cost.  Method  A  would  be  correct,  and  Method  B  would  give 
no  different  results  in  costing  orders  provided  that  the  condition 
postulated  for  the  application  of  Method  A  were  present.  But 
if  they  were  not  present,  and  if  different  wage  rates  were  paid  in 
the  shop,  or  different  rates  of  earnings  were  possible  owing  to 
some  piecework  or  bonus  arrangement,  then  Method  A  would  not 
give  correct  results,  but  Method  B  would  give  much  nearer  re- 
sults. That  is,  Method  B  would  be  correct  as  to  direct  labor  and 
direct  material,  but  would  still  probably  not  be  exact  as  to 
expense. 

Little  need  be  said  as  to  the  variation  of  Method  B  already 
mentioned,  wherein  the  expense  is  prorated  to  Orders  not  on  the 


62        MANUFACTURING  COSTS  AND  ACCOUNTS 

basis  of  direct  wages,  but  on  the  bases  of  process-hours.  The 
only  additional  mechanism  necessary  to  apply  this  variation 
would  be  the  provision  of  columns  alongside  the  direct  wages 
columns,  both  in  the  Cost  Sheets  and  the  Cost  Journal,  in  which 
columns  would  be  entered  the  number  of  hours  worked  by  the 
operative  of  each  order.  The  total  expense  for  the  department 
would  then  be  divided  by  the  total  process-hours  as  shown  by 
totaling  the  new  column  in  the  Cost  Journal,  and  the  value  of 
a  process-hour  in  terms  of  expense  thus  found.  In  the  case 
exhibit  it  would  be  $510,  2,000  hr.,  2}4  cts.  per  hour.  Then 
each  entry  in  the  Cost  Journal  would  be  extended  at  this  rate,  and 
the  expense  entered  in  the  proper  column  as  before.  Under  some 
conditions  this  method  would  bring  slightly  more  correct  results 
than  the  other,  particularly  where  the  system  of  piecework  was 
in  use.  But  it  does  not  remove  any  of  the  objections  to  the  use 
of  Method  B  mentioned  at  the  beginning  of  this  chapter. 

So  far  we  have  considered  only  the  costing  of  orders.  That 
is  to  say  that  the  arrangements  hitherto  described  provide  the 
cost  of  an  order  as  a  whole,  without  considering  whether  it  is 
made  up  of  a  single  part  or  several  parts.  We  can,  however, 
on  Method  B  in  either  of  its  variations,  do  more  than  this.  Sup- 
pose that  an  order  is  for  sets  of  fire-irons,  each  set  consisting  of 
poker,  tongs  and  fire-shovel.  Then  if  we  issue  an  order  for  5,000 
sets,  we  shall  get  the  cost  in  a  lump  sum  without  detail.  But 
by  the  additional  device  of  component  numbers  or  part  numbers, 
we  can  get  the  record  in  as  great  detail  as  we  desire. 

If  the  order  number  for  the  5,000  sets  is  No.  378,  then  we  may 
call  378/1  pokers,  378/2  tongs  and  378/3  fire-shovels.  If  now, 
the  operatives  charge  their  time  accordingly,  we  shall  be  able 
at  some  convenient  time  to  collect  all  the  items  charged  to  378/1 
and  so  ascertain  separately  the  cost  of  5,000  pokers.  The  process 
is,  of  course,  repeated  with  regard  to  /2  and  /3. 

Further,  suppose  that  in  making  pokers  in  the  department 
under  discussion,  they  went  through  three  separate  processes, 
it  will  not  be  difficult  to  analyze  the  time  record  so  as  to  dis- 
close how  much  of  the  cost  was  due  to  say,  filing,  grinding  and 
polishing  respectively.  The  actual  mechanism  for  doing  this 
need  not  be  described  now,  but  it  will  easily  be  seen  that  if  we 
know  what  work  each  individual  man  is  doing,  all  the  data  for 
such  an  analysis  are  present.  The  cost  of  Order  No.  378  could, 
therefore,  now  be  presented  in  the  following  shape: 


COSTING  ON  METHOD  B  63 

Cost  of  Order  No.  378  for  5,000  Sets  Fire-irons 


Dir.  labor 

Expense 

Dir.  mat'] 

Total 

378/1  for  5,000  pokers: 

Filing 

Grinding 

Polishing 

120              96 
130             104 
200            160 

216 
234 
360 

Total  for  378/1 

450 

360 

810 

Each  16^  cts. 

378/2  for   5,000  pairs 
tongs : 

Filing 

Grinding.  .  .  . 

140 
150 
300 

112 
120 
240 

252 
270 
540 

Polishing 

Total  for  378/2 

590 

472 

1,062 

Each21^cts. 

378/3  for  5, 000  shovels: 

Grinding 

Polishing 

90 
500 

72 
400 

162 
900 

Total  for  378/3 

590 

472 

1,062 

Each  21  yi  cts. 

Grand  total  for  378 .  .  . 

1,630 

1,304 

2,934 

58%   cts.   per 
set 

Expense  rate  =  80  per  cent,  of  direct  wages.     No  material  charged. 


In  this  example  it  is  assumed  that  no  material  is  chargeable 
by  this  department,  but  that  process  work,  namely,  filing,  grind- 
ing and  polishing  is  done  by  it  on  blanks  received  from  another 
department.  The  total  cost  of  the  order  is  $2,934,  equal  to 
58%  cts.  per  set  of  articles.  By  the  analysis  shown,  however, 
we  see  that  the  pokers  cost  16^  cts.  each,  the  tongs  21^  cts. 
each  and  the  shovels  also  21^  cts.  each.  On  examining  the 
detail  of  the  last  figures  we  observe  that  though  the  total  proc- 
ess-cost of  each  is  the  same,  it  is  very  differently  made  up. 
Tongs  have  three  processes  and  shovels  only  two,  and  we  see 
that  the  polishing  process  in  the  case  of  shovels  forms  a  very 
important  item  of  cost. 

This  table  is  already  a  very  detailed  statement  of  the  cost 
of  Order  378,  but  we  can  extract  yet  further  information  from 
the  figures: 


64        MA  N I  FA  ( '  TURING  COSTS  AND  ACCOUNTS 

Process-cost  of  pokers: 

Filing 4.32  cts.  each 

Grinding 4.68  cts.  each 

Polishing 7.20  cts.  each 

Process-cost  of  tongs: 

Filing 5.04  cts.  each 

Grinding 5 .  40  cts.  each 

Polishing 10.80  cts.  each 

Process-cost  of  shovels : 

Grinding 3.24  cts.  each 

Polishing 21.24  cts.  each 

Further  than  this  it  is  not  possible  to  go  under  ordinary 
circumstances.  Yet  it  is  obvious  that  other  information  might 
be  desired.  For  example,  a  poker  has  three  portions,  the  knob, 
the  stem  and  the  iron  or  prod.  We  might  find  it  advantageous 
to  know  what  it  cost  us  for  process  work  on  each  of  these  portions 
separately.  This  could  be  done  without  much  difficulty  if 
the  operative  were  instructed  to  note  the  part  he  was  working  on, 
so  that  he  would  record  his  time  as  on  "Order  378/1,  Polishing, 
Knob,"  and  so  forth. 

It  will  be  readily  understood  that  all  this  detail  has  very  little 
necessity  for  commercial  accounting  purposes.  If  the  fire-irons 
are  always  sold  in  unbroken  sets  of  poker,  tongs  and  fire-shovel, 
thou  the  accountant  would  have  no  interest  in  knowing  any 
detail  at  all.  The  figure  of  $2,934  for  5,000  sets  would  alone 
interest  him,  since  from  this  he  obtains  the  cost  per  set,  and  so 
is  able  to  credit  Manufacturing  account  with  finished  work. 
Later  on  he  will  also  require  the  same  cost  per  set  for  sales 
purposes,  but  at  no  point  will  he  be  interested  in  the  cost  of 
pokers,  tongs  and  shovels  separately,  still  less  in  the  process 
costs  of  grinding,  filing,  etc. 

The  value  of  such  detail  is,  however,  very  great  to  those  who 
are  responsible  for  manufacturing  operations,  and  a  frequent 
source  of  the  friction  that  arises  over  cost  systems  is  the  inability 
of  the  acountant  to  perceive  the  importance  of  such  detail  to 
others,  and  particularly  of  the  importance  of  providing  it  with 
exceeding  promptness.  Technical  detail  of  this  kind  is  next  to 
valueless  if  not  available  for  discussion  while  the  circumstances 
are  fresh  in  everyone's  mind. 

We  have  now   to   consider  the   crediting   of  Manufacturing 


COSTING  ON  METHOD  B  65 

account  with  the  value  at  cost  of  finished  work.  The  Cost 
Sheets  now  provide  the  data  by  which  the  cost  of  any  finished 
order  is  ascertained.  As  each  order  is  finished  it  is  entered  in 
the  Finished  Work  Journal  (see  Fig.  15)  and  the  total  of  all 
finished  orders  for  the  month  credited  to  Manufacturing  account 
and  charged  to  Finished  Work  account.  It  is  sometimes  thought 
well  to  rule  the  ledger  accounts  for  manufacturing  and  finished 
work  with  columns  for  direct  labor,  direct  material  and  expense. 
In  this  case  postings  from  both  the  Cost  Journal  and  the  Finished 
Goods  Journal  are  made  in  the  same  form. 

Only  one  Finished  Work  account  is  shown  in  Fig.  15,  though 
more  than  one  can  be  used  if  it  is  desired  to  keep  two  or  more 
lines  of  product  distinct.  Generally,  where  several  lines  of 
product  are  running  at  one  time,  an  account  for  each  separate 
line  of  product  is  desirable. 

When  orders  are  introduced  for  definite  quantities  it  will 
almost  inevitably  happen  that  some  of  them  will  be  unfinished 
at  the  month  end,  and  will  consequently  not  be  transferred  to 
Finished  Work  account.  This  implies  that  there  will  be  a  balance 
in  Manufacturing  account  of  a  varying  amount  at  each  month 
end.  This  balance  will  be  represented  by  Cost  Sheets  still 
in  hand  in  the  department  and  the  balance  should  be  checked 
with  the  total  of  Cost  Sheets  remaining  on  hand. 

When  one  of  the  orders  represented  by  such  Cost  Sheets  is 
completed,  it  will  of  course  be  charged  to  Finished  Work,  credited 
to  Manufacturing  account,  and  withdrawn  from  the  current 
file  of  orders  in  hand,  just  in  the  same  way  as  if  it  had  been 
finished  during  the  month  in  which  it  had  first  been  put  in  hand. 


CHAPTER  VII 
COSTING  ON  METHOD  C 

The  two  methods  of  costing  hitherto  discussed  are  both  depend- 
ent on  averaging  at  some  point.  In  Method  A  all  elements  of 
departmental  cost  (excluding  direct  material)  are  thrown  into 
one  sum,  and  then  spread  over  product  on  the  basis  of  an  aver- 
age cost — either  an  average  monthly  cost  or  an  average  hourly 
cost  as  the  case  may  be.  In  Method  B  while  direct  material 
and  direct  labor  are  both  charged  to  the  actual  items  of  product 
to  which  they  naturally  belong,  expense  on  the  other  hand  is 
thrown  into  one  lump  sum  and  averaged  over  all  product  on  one 
of  two  bases.  Sometimes  this  basis  is  a  simple  percentage  dis- 
tribution of  expense  in  proportion  to  the  amount  of  direct  labor 
already  charged  to  the  product,  and  sometimes  the  average  cost 
of  an  expense-hour  is  calculated,  and  expense  is  charged  to  Prod- 
uct according  to  the  number  of  process-hours  involved  in  its 
production. 

"We  may  sum  up  these  two  methods  by  saying  that  in  the  first, 
both  labor  and  expense  are  averaged  over  product  on  a  time  basis, 
and  that  in  the  second,  expense  is  averaged  over  product  on  a  time 
basis.  It  becomes  evident  that  a  third  method  is  desirable, 
namely  one  in  which  no  averaging  at  all  is  made  use  of,  but  both 
labor  and  expense  should  be  charged  to  Production  exactly  as  and 
when  incurred  by  each  order  or  process.  Such  a  method  was 
worked  out  by  the  author  in  1901,  and  is  known  as  the  "Scientific 
Machine  Rate"  method.     It  will  now  be  discussed  as: 

Method  C  :  Material,  Labor  and  Expense  all  Charged  Direct  to 
Product,  As  and  When  Incurred. — The  mechanism  for  charging 
direct  material  and  direct  labor  to  Orders  is  the  same  in  this 
method  as  in  Method  B.  The  special  feature  of  Method  C  is  in 
its  treatment  of  the  various  items  of  expense,  and  the  way  in 
which  charges  for  expense  elements  are  made  to  Orders,  on  the 
one  hand,  and  to  an  undistributed  expense  account  on  the  other. 
For  a  valuable  feature  of  the  production  factor  and  machine  rate 
method   is    the   power    it   furnishes   of   distinguishing  between 

66 


COSTING  ON  METHOD  C  67 

expense  actually  and  usefully  applied  to  production,  and  expense 
that  is  wasted  and  contributes  nothing  to  production,  owing  to 
part  of  the  departmental  equipment  being  idle. 

The  principle  on  which  Method  C  is  founded  is  a  simple  one. 
Expense  is  incurred  for  the  purpose  of  running  the  machines  or 
other  production  centers  of  the  department,  because  manufac- 
turing consists  of  two  main  actions :  first,  the  application  of  opera- 
tive (direct)  labor  to  product;  and  secondly,  the  application  of 
equipment,  supervision,  etc.,  by  aid  of  which  such  direct  labor 
is  applied  to  product.  No  labor  works  on  product  with  its 
hands  alone,  always  tools,  and  in  modern  manufacturing 
machines  are  generally  employed.  In  some  cases,  even,  and  these 
are  increasing  in  number  every  da}r,  the  role  of  labor  is  subsidiary 
to  the  role  of  the  machine — that  is  to  say  that  labor  does  not  con- 
tribute any  special  skill  or  experience,  but  acts  rather  as  an  access- 
ory to  the  machine,  as  in  the  instance  of  automatic  machines  of 
various  classes. 

But  if  expense  is  incurred  for  the  purpose  of  running  machines, 
there  ought  to  be  some  connection  between  its  amount  and  the  duty 
of  any  given  machine.  A  simple  illustration  is  that  of  power. 
The  whole  charge  to  the  department  for  power  is  obviously 
connected  intimately  with  the  power-using  capacity  of  the 
individual  machines.  Now  if  all  the  machines  consume  the 
same  amount  of  power,  then  it  is  obvious  that  a  uniform  or 
average  hourly  rate  for  power  might  be  made  to  all  product,  on 
whatever  machine  it  happened  to  be  processed.  But  if,  on  the 
other  hand,  it  should  happen  that  all  machines  do  not  consume 
the  same  amount  of  power,  but  that  some  consume  say  12  hp. 
per  hour,  and  others  only  }4  hp.,  then  an  average  charge  for 
power  becomes  misleading.  Here  then  is  an  example  where  the 
averaging  of  an  expense  detail  leads  to  very  incorrect  results, 
while  at  the  same  time  the  way  to  rectify  this  incorrectness  is 
pointed  out.  Instead  of  making  an  average  charge  for  power, 
it  would  be  desirable  to  ascertain  what  is  the  hourly  consumption 
of  each  machine  and  then  charge  Orders  with  the  power  actually 
used  in  working  on  them. 

Thus,  if  one  order  is  processed  at  a  machine  taking  12  hp. 
per  hour,  at  a  cost  of  say  2  cts.  per  horsepower,  then  if  the  work 
has  taken  3  hr.  we  have  a  legitimate  charge  against  that  order  of 
12  X  2  X  3  =  72  cts.  And  if  another  order  has  been  processed 
on  a  machine  taking  only  ^  hp.  per  hour,  and  the  work  has 


68        MANUFACTURING  COSTS  AND  ACCOUNTS 

taken  3  hr.  also,  then  we  have  0.5  X  2  X  3  =  3  cts. — no  in- 
considerable difference  in  the  cost  of  the  work  for  power 
alone. 

Under  the  percentage  method  (B)  both  these  orders  would  have 
been  charged  alike  with  an  average  cost  for  power  (included  and 
disguised  in  the  expense  total)  which  might  have  been  at 
the  rate  of  5  cts.  an  hour  for  any  machine.  This  would  give 
for  the  first  order  5  X  3  =  15  cts.  cost  for  power,  etc.,  and  for  the 
second  order  5  X  3  =  15  cts.  for  power  also.  In  the  first 
case  the  charge  would  be  57  cts.  too  little,  and  in  the  second  case 
12  cts.  too  much. 

Of  course,  on  Method  B  no  separate  charge  is  made  for  power, 
which  is  merged  in  the  conglomeration  of  items  that  go  to  make 
up  expense,  but  if  an  analysis  were  made  of  such  expense  we 
should  find  it  made  up  of  a  number  of  items,  including  power, 
which  were  distributed  and  averaged  over  product  on  just  such 
an  unsatisfactory  plan  as  that  here  exhibited.  The  peculiarity 
of  Method  C  is  that  it  discards  the  usual  classification  of  the 
cost  components  into  direct  material,  direct  labor  and  expense  or 
burden,  and  in  place  of  expense  it  substitutes  production  factors 
(of  which  power  is  one)  and  ascertains  with  considerable  exactness 
the  connection  of  each  of  these  factors  with  the  cost  of  running 
individual  machines.  The  demonstration  just  made  of  the  erro- 
neous results  arising  from  the  averaging  method  as  applied  to 
power  could  be,  if  space  permitted,  extended  to  show  that  other 
factors  were  subject  to  the  same  errors  when  included  in  a  lump 
sum  of  expense  and  averaged. 

In  the  three  methods  of  costing  (A,  B  and  C)  there  are  three 
stages  of  inquiry  and  answer  as  to  the  direct  charges  made  to 
Product.     In  the  first  method  (A)  we  ask: 

What  is  this  direct  material  used  for?  and  the  answer  is  given 
that  more  of  it  is  used  for  one  kind  of  product  or  one  order  and 
less  for  another  kind  of  product  or  another  order. 

In  the  second  method  (B)  we  extend  the  range  of  our  inquiries, 
and  ask  two  questions: 

What  is  this  direct  material  used  for? 

What  is  this  direct  labor  used  for? 
the    answer    to    both    queries    being    the    same,    namely,   that 
more  of  each  item  is  used  for  this  order  and  less  for  that,  or 
more  for  this  product  and  less  for  that. 

In  the  third  method  (C)  we  extend  the  range  of  our  inquiries 


COSTING  ON  METHOD  C  69 

still  further,  and  this  time  take  in  the  whole  of  the  components 
of  departmental  cost.     We  ask  three  questions: 

What  is  this  direct  material  used  for? 

What  is  this  direct  labor  used  far.' 

What  is  this  expense  incurred  for? 
and  the  answer  to  all  three  queries  is  the  same,  namely,  thai  all 
three  of  the  items  have  individual  relations  to  each  order.  Further 
we  are  enabled  to  state  that,  under  given  conditions,  certain  por- 
tions of  the  expense  have  relation  to  no  order  at  all,  or  in  other 
words  have  not  entered  into  production,  but  have  been  wasted. 

It  will  be  readily  understood  that  Method  C,  involving  as  it 
does  a  careful  tracing  of  the  incidence  of  every  different  class  of 
expense,  is  by  no  means  so  "simple"  to  set  up  as  the  other  two 
methods.  The  simplicity  of  all  three  methods  is,  in  fact,  in  in- 
verse proportion  to  their  accuracy  when  we  apply  them  to  com- 
plex conditions.  There  are  cases  in  which  both  A  and  B  give 
accurate  results,  but  when  machinery  of  varying  capacity  comes 
into  use  in  an  industry,  and  orders  may  be  worked  on  now  by 
large,  expensive  and  high-power  machines  and  again  by  small, 
cheap  and  low-power  machines,  then  the  conditions  themselves 
are  complex.  Complex  conditions  necessarily  involve  complex 
solutions  if  we  are  really  to  get  accurate  results,  and  not  merely 
inaccurate  averages.  In  point  of  working,  when  once  the  system 
is  set  up,  there  is  not  much  difference  between  B  and  C,  especially 
where  the  hourly-burden  variety  of  B  is  used  for  comparison. 

Figure  16  exhibits  the  mechanism  necessary  to  establish 
Method  C.  Fig.  17  shows  the  routine  working  of  this  method  in 
costing  orders.  It  will  be  noticed  that  while  Fig.  16  is  entirely 
different  to  anything  yet  considered,  Fig.  17  on  the  other  hand 
differs  but  little  from  previous  figures  illustrating  the  working  of 
methods  A  and  B.  It  will,  of  course,  be  understood  that  in  this 
chapter  no  attempt  is  made  to  detail  the  methods  by  which 
the  analysis  of  the  various  factors  is  carried  out  in  practice, 
but  only  to  show  the  general  outline  of  the  principles  involved 
The  practical  application  of  the  method  will  be  dealt  with  in  the 
second  portion  of  this  work. 

To  begin  with  we  have,  as  before,  certain  accounts  which 
contain  the  whole  of  the  cost  components  chargeable  against 
the  department.  We  exclude  consideration  of  direct  material 
and  direct  labor,  since  these  are  charged  to  individual  orders, 
and  confine  ourselves  to  understanding  how  expense  is  so  handled 


71 )        M A  A  I  /■■. \CT URING  COSTS  A ND  A CCO UN TS 

that  it  finds  itself  finally  charged  to  individual  orders  in  the 
amount  which  each  order  has  logically  and  actually  incurred. 

The  principle  of  standardization  comes  into  play  at  this  point. 
Our  charges  to  Product  are  made  through  hourly  machine  rates, 
but  these  rates  are  standard  rates,  which  represent  the  cost  of 
running  the  machine  for  1  hr.  under  standard  and  favorable  con- 
ditions. This  is  a  matter  that  does  not  arise  from  any  particular 
month's  accounts,  but  is  determined  on  a  basis  of  estimate  as  to 
how  the  normal  expenditure  of  the  shop,  (when  the  shop  is  run- 
ning full  time)  divided  into  factors,  contributes  to  the  running 
of  each  machine. 

In  Fig.  16  a  very  general  idea  is  given  of  the  method  by  which 
machine  rates  are  determined.  First,  all  the  normal  expense 
of  the  department  is  tabulated,  and  analyzed  into  production 
factors.  Then  a  list  of  machines  is  made,  and  each  production 
factor  is  allocated  between  the  different  machines  on  appropriate 
bases.  The  total  found  allocated  against  each  machine  when 
all  the  production  factors  have  been  dealt  with,  is  the  individual 
cost  of  running  machines.  This  amount,  divided  by  the  number 
of  working  hours  in  the  period  for  which  the  calculation  has  been 
made  (usually  machine  rates  are  based  on  one  year's  expense) 
gives  an  hourly  machine  rate,  which  is  the  amount  that  is  charge- 
able to  Orders  for  the  use  of  the  machine  (Fig.  1QA). 

The  machine  rates  are  so  adjusted  that  when  all  the 
machines  are  working  "full"  time,  then  all  the  expense  charge- 
able against  the  department  is  distributed  over  the  orders  that 
have  been  worked  on.  But  it  will  readily  occur  to  everyone  that 
in  the  course  of  a  month,  it  may  not  have  been  possible  to  keep 
all  the  machines  full  of  work.  In  some  cases  this  is  inevitable, 
as  for  example,  such  machines  as  are  subsidiary  to  others,  and 
have  an  output  greater  than  any  possible  use  for  it.  In  such 
cases  "full"  time  is  considered  to  be  the  normal  time  of  use  of 
such  machines.  For  example,  if  we  have  a  subsidiary  machine, 
such  as  an  envelope  gummer,  serving  six  folding  machines, 
and  of  such  a  capacity  that  to  keep  all  the  folding  ma  chines  full 
of  work,  it  need  only  be  run  75  per  cent,  of  the  working  time 
of  the  department,  then  the  "full"  time  of  such  a  machine  is 
fixed  at  75  per  cent,  of  the  "full"  time  of  1  he  folding  machines  that 
it  serves.  Of  course,  should  at  any  time,  more  folding  machines 
be  installed,  the  "full"  time  of  the  gumming  machine  would  be 
increase!  1  j  >i  <  iportionally. 


COSTING  ON  METHOD  C  71 

In  other  cases,  this  principle  of  curtailing  the  "full"  time 
of  a  machine  does  not  apply.  If  we  have  30  milling  machines, 
and  during  a  slack  period  six  of  them  are  idle,  that  is  a  totally 
different  matter.  The  whole  30  could  be  used  it"  we  had  work  for 
them.  It  might  even  happen  that  there  was  really  enough 
work  in  the  shop,  but  that  owing  to  bad  planning  one-fifth  of 
the  "full"  time  of  the  30  machines  was  left  unused.  Both  these 
latter  cases  are  similar  in  effect.  They  imply  wasted  opportuni- 
ties. But  neglect  or  inability  to  employ  opportunity  to  the  full 
should  not  be  visited  on  the  work  actually  performed.  In  other- 
words,  the  cost  of  idle  machines  should  be  separated  from  the  process- 
cost  of  work. 

This  is  a  most  important  matter  from  the  viewpoint  of  esti- 
mating. Suppose  we  have  a  job  that  takes  the  "full"  time  of  three 
of  our  milling  machines  for  a  month,  and  let  us  assume  that  the 
hourly  machine  rate  of  each  of  these  particular  milling  machines 
is  25  cts.  an  hour,  and  further  that  the  working  hours  are  200  a 
month.     Then  the  actual  process-cost1  of  doing  the  work  is: 

3  X  0.25  X  200  =  $150. 

Now  supposing  that  by  some  unfortunate  circumstance  we  could 
provide  no  other  work  at  all  in  the  shop,  and  that  all  other  ma- 
chines were  closed  down.  Let  us  suppose  that  the  27  milling  ma- 
chines not  occupied  on  the  above  order,  absorbed  at  various 
hourly  machine  rates  when  working  "full"  time,  $1,080.  What 
was  the  cost  of  doing  the  work  on  the  three  machines  that  were 
busy? 

Is  it  $150  or  is  it  $150  +  $1,080  =  $1,230? 

On  the  percentage  method  (B)  the  latter  is  the  answer  that 
would  be  given.  On  that  method,  all  the  expense  is  discharged 
on  to  the  jobs  that  have  been  actually  worked.  If  only  three 
machines  had  been  at  work,  then  the  orders  worked  on  at  those 
three  machines  would  have  to  bear  the  burden  of  the  whole 
expense  of  the  shop.  From  the  merely  accounting  viewpoint 
that  is  a  sufficiently  good  answer,  since  the  $1,080  has  to  be  taken 
out  of  Manufacturing  account  somehow,  and  the  easiest  way 
to  get  it  out  is  to  let  it  cling  to  the  skirts  of  whatever  work 
has  been  executed  in  the  shop.     In  one  sense  it  does  represent 

1  Direct  material  and  labor  are  excluded  from  this  discussion  in  order  to 
bring  out  the  facts  as  to  expense  into  clear  relief. 


72        MANUFACTl  'RING  COSTS  AND  ACCOUNTS 

the  cost  of  manufacture  of  the  department  output.  The  money 
SI, 230  has  been  spent,  and  only  three  machines'  output  has  re- 
sulted.    This  output  has,  therefore,  "cost"  $1,230. 

The  practical  fallacy  underlying  this  method  is  exhibited  by 
the  question,   "By  whom  should  this  cost  be  borne?" 

Obviously  it  is  not  the  customer  who  has  lost  the  money  which 
has  been  wasted  through  the  fact  that  we  have  not  enough  work 
to  fill  the  shops.  He  will  not  expect  to  pay  more  because  we 
have  been  commercially  unlucky  or  inefficient.  If  more  work  of 
the  same  class  is  offered  to  us  while  our  shops  are  still  in  the  same 
condition,  would  it  be  wise  to  quote  $1,230  for  the  work?  The 
answer  is  obvious.     If  we  did  so,  we  should  lose  the  order. 

On  Method  B,  there  is  no  way  out  of  this  dilemma,  because 
it  is  not  possible  by  that  method  to  arrange  any  accurate  division 
between  expense  legitimately  incurred  on  a  particular  job  and  that 
portion  of  the  percentage  which  is  due  to  idle  machines.  It  has 
been  suggested  that  a  "normal"  or  "minimum"  percentage 
might  be  set  up  and  used  for  estimating  purposes,  but  this  is 
only  possible  when  conditions  obtain  under  which  Method  B 
is  in  itself  a  correct  costing  method.  To  apply  the  principle  of 
a  "normal"  percentage  rate  to  all  work  indiscriminately  would 
be  fallacious,  unless  all  machines  were  of  the  same  size,  value 
and  power  consumption. 

It  is  evident  that  the  correct  answer  to  the  question  is  that 
the  increased  "cost"  must  be  borne  by  the  firm  itself.  It  must 
be  deducted  in  the  end,  and  by  some  convenient  mechanism, 
from  the  firm's  own  profit.  This  is,  of  course,  what  happens 
if  we  leave  it  in  cost,  and  that  is  why  accountants  look  with  so 
much  favor  on  the  plan.  By  putting  into  cost  of  an  order  the 
wasted  expense  that  has  been  incurred  in  a  shop,  Profit  is  auto- 
matically reduced  without  anyfurther  attention  from  theaccount- 
ant.  Unfortunately,  however,  it  is  the  wrong  profit  that  is 
thus  reduced,  and  orders  that  are  in  reality  very  profitable 
may  }><■  made  to  show  a  narrow  margin  of  profit  or  even  a  loss. 

When  several  machines  in  a  shop  stand  idle,  it  is  not  the  profit 
of  any  particular  order  that  should  be  reduced,  but  the  general 
profit  of  the  whole  business,  or  at  utmost  the  profit  of  the  depart- 
ment in  which  the  loss  was  incurred,  if  the  business  is  organized 
on  a  basis  of  profit-making  department.-. 

Method  ('  enables  this  to  be  effected.  The  cost  of  doing  the 
job   above   mentioned   will  always  be  $150,  whether  the  shop 


COSTING  ON  METHOD  C  73 

is  busy  or  slack.  Consequently  we  always  know  what  to  bid  on 
similar  work.  The  question  then  arises,  What  becomes  of  the 
SI, 080  which  has  been  wasted  through  the  unfortunate  fact 
that  we  have  had  insufficient  work  to  fill  the  shop? 

There  are  two  ways  of  disposing  of  it.  Either  way  deducts 
it  from  profit  in  the  end.  It  may  be  charged  at  once  to  Profit 
and  Loss  account  and  thus  deducted  directly  from  profit,  or  we 
may  do  something  which  brings  up  the  individual  cost  to  a 
figure  similar  in  form  to  that  which  would  be  reached  on  Method 
B,  viz.,  by  striking  a  ratio  between  the  actual  expense  cost  of 
jobs  and  the  total  of  wasted  expense,  thus: 


Legitimate  expense  on  work 

Wasted  expense 1,080 

Total $1,230 

Wasted  expense  =  600  per  cent,  on  cost  of  work. 

Having  ascertained  what  percentage  to  add  to  the  legitimate 
cost  of  the  work  in  order  to  absorb  the  whole  of  the  department 
expense,  we  may  proceed  to  prorate  over  actual  jobs  so  as  to 
show  cost  in  two  divisions,  namely: 

Cost  of  job $180 

600  per  cent,  on  cost  of  job 1,080 

Total  cost  of  job $1,230 

In  order  to  give  a  clearer  idea  of  this  method  in  its  full  bearing 
on  the  cost  of  orders  we  will  assume  that  the  $180  work  is  really 
made  up  of  three  distinct  orders,  costing  respectively,  for  machine 
rates,  $60,  $90  and  $30.  It  will  be  assumed  that  this  is  merely 
a  machining  job  for  a  customer  and,  therefore,  that  there  is  no 
charge  to  be  made  for  direct  material.  Direct  labor  is  day  work, 
and  is  respectively  $50,  $75  and  $25  for  each  job.  The  total 
expense  for  the  shop  is  as  before  $1,230. 

Costs  may  then  be  stated  as  follows: 

Order  678     Order  679        Order  680        Total 

Direct  labor $50  $75  $25  $150 

Machine  rates , .         60  90  30  180 

True  cost  of  work $110         $165  $55  $330 


74        MANUFACTURING  COSTS  AND  ACCOUNTS 

Undistributed  expense  Sl,080  =  600  per  cent,  on  expense 
distributed  to  jobs  through  machine  rates.  This  is  called 
"Supplementary  Rate." 

Supplementary  rate  on  above  jobs     $300         $540         $180       $1,080 

Apparent  shop  cost $470         $705         $235       $1,410 

Xow  it  will  be  clear  that  (neglecting  selling  expense)  a  fair 
profit  on  the  orders  would  be  made  by  charging: 

Sale  price $147  $220  $73 

Real  profit 25  per  cent. 25  per  cent. 25  per  cent. on  sale  price 

Apparent  loss $323  $485  $162 

This  is,  of  course,  an  exaggerated  case,  but  for  that  very 
reason  shows  the  importance  of  keeping  undistributed  or  wasted 
expense  clear  from  the  cost  of  orders. 

It  will  be  seen  that  by  this  method  we  have  two  costs  for 
each  order,  namely: 

True  shop  cost  of  doing  the  work. 

Apparent  shop  cost  of  the  order. 
The  latter   cost  is   true   cost  plus  a  percentage   to   represent  a 
proportionate  share  of  the  wasted  manufacturing  capacity  that  has 
been  incurred  in  the  shop  owing  to  the  fact  that  there  was  not 
enough  work  to  keep  all  the  machines  employed. 

In  the  case  cited  such  apparent  cost  has  no  real  value  at  all. 
It  is  so  obviously  fictitious  that  no  one  would  be  inclined  to 
regard  it  seriously  for  a  moment.  But  if  instead  of  three 
machines  being  at  work  and  27  idle,  27  machines  were  at  work 
and  only  three  idle,  the  difference  between  true  and  apparent 
cost  would  not  be  so  striking,  and  there  would  in  fact  be  nothing 
on  the  face  of  the  figures  to  show  their  falsity.  Yet  they  would 
still  be  false  and  misleading,  if  we  took  apparent  cost  as  a  basis 
for  bidding  on  work. 

It  may  be  asked  what  is  the  purpose  in  distributing  the  wasted 
expense  over  orders  in  this  way.  First,  it  is  a  concession  to  those 
accountants  who  desire  to  get  rid  of  all  shop  expense  onto  product 
as  they  have  been  accustomed;  secondly,  there  is  a  certain 
amount  of  danger  of  establishing  a  precedent  to  the  effect  that 
departmental  expense  can  be  written  off  to  Profit  and  Loss; 
thirdly,  there  is  a  distinct  advantage  in  having  the  whole  story 
told  in  respect  to  each  order,  viz.,  its  true  shop  cost  and  the  in- 


COSTING  ON  METHOD  C 


75 


crease  on  this  which  is  due  to  failure  to  keep  machines  supplied 
with  work.  Because  it  must  not  be  forgotten  that  this  supple- 
mentary rate  is  due  to  idle  machines  whatever  the  cause.  In 
most  cases  the  cause  will  be  want  of  work,  but  it  might  quite 
easily  be  want  of  management,  and  inefficiency  in  distributing 
what  work  was  actually  in  the  shop.  For  this  latter  reason 
alone  it  is  undesirable  to  make  a  practice  of  writing  off  undistrib- 
uted expense  to  Profit  and  Loss.  Such  a  condition  should  be 
called  to  attention  all  along  the  line,  not  hidden  away.  By 
making  a  supplementary  distribution  to  Orders,  the  fact  of 
wasted  expense  is  kept  prominently  before  everyone.     At  the 


ITEM 

TOTAL 

BLDG.'S 

POWER 

STORES 
TBAN8. 

SCP. 

ORQ'N 

MACH. 

Depreciation 

Repairs 

Cleaning 

Storekeeping 

Cranemen  &c 

Supervision 

Clerks 

Stationery 

Messengers 

Light  &  Heat 

Power  etc 

TOTALS 

Fig.  16. — Analysis  of  expense  into  production  factors. 


same  the  true  cost  of  the  work  is  also  shown,  and  it  is  clearly  seen 
whether  the  individual  order  was  profitable  or  not,  even  though 
the  slackness  of  business  should  have  overwhelmed  that  profit 
by  a  general  loss  due  to  expense  that  has  been  wasted.  This 
question  is  further  discussed  in  Chap.  XIX  (  Part  II). 

Figure  16  shows  an  outline  of  the  mechanism  by  which  machine 
rates  are  settled.  To  begin  with,  all  the  expense  legitimately 
chargeable  to  the  department  for  a  certain  period,  usually  one 
year,  is  listed  in  considerable  detail  Then  item  by  item,  the 
question  is  asked,  "For  what  is  this  expense  incurred?"  Thus, 
for  example,  when  the  item  of  depreciation  is  under  discussion 
it  will  be  found  that  part  of  it  is  due  to  the  capital  invested  in 


70        MANUFACTURING  costs  AND  ACCOUNTS 

buildings,  part  to  that  invested  in  power  transmission  gear, 
motors,  etc.,  in  the  shop,  part  to  investment  in  cranes,  stores 
fittings,  scales,  etc.,  and  the  remainder,  probably,  all  to  the 
productive  machinery  itself.  The  amounts  chargeable  against 
these  several  divisions  or  "production  factors"  having  been 
calculated,  the  columns  are  entered  up  accordingly. 

Other  items  of  expense  are  dealt  with  in  a  similar  way.  In 
practice  it  will  be  found  that  every  legitimate  item  of  depart- 
mental expense  will  be  chargeable  in  an  exact  amount  to  one 
or  other  of  the  production  factors,  after  a  little  investigation. 
"When  all  the  items  of  expense  have  been  thus  allocated,  the 
columns  are  totaled,  and  the  yearly  charge  for  each  production 
factor  is  then  known. 

The  next  step  is  to  ascertain   what  amount  of  each  factor 


FACTOR 

BASIS  OF 
DISTRIBUTION 

TOTAL 

MACHINE8 

Buildings 

Space 

Power 

H.P.used 

Stores    Tpt, 

by  use 

Supervision 

as  incurred 

Organization 

Equal 

Machines 

Individual 

TOTAL 

HOURLY  RATE 

Fig.  16A. — Analysis  of  production  factors  into  individual  machine  rates. 

is  chargeable  to  individual  machines.  To  begin  with  certain 
data  with  regard  to  each  machine  are  accumulated,  viz. : 

The  working  space  it  occupies. 

The  horsepower  it  consumes. 

What  cranes  or  other  transport  appliances  serve  it. 

How  is  it  grouped  as  regards  supervision. 

Its  capital  or  investment  value  (purchase  and  installation 
price). 

On  these  data  as  bases  the  distribution  of  1  lie  amounts  collected 
under  each  production  factor  can  then  proceed. 

1.  The  buildings  factor,  including  all  expense  for  the  upkeep 
and  maintenance  of  the  building,  and  its  lighting,  heating, 
•  leaning  and  repair,  is  reduced  to  a  square  foot  basis.  Thus, 
if  the  buildings  factor  is  §4,000  and  there  are  2,000  sq.  ft.  in 
use    by    machines    in    the    department,    then    the    space    charge 


COSTING  ON  METHOD  C  77 

is  $2  per  square  foot.  As  the  number  of  square  feet  working 
space  occupied  by  each  machine  is  known,  the  charge  againsl 
individual   machines  for  buildings  factor  is  easily   calculated. 

2.  The  power  factor  is  similarly  allocated  on  the  basis  of  the 
horsepower  consumed  by  each  machine. 

3.  The  stores-transport  factor  is  allocated  by  finding  out 
which  machines  call  on  which  cranes  or  other  transporl  ap- 
pliances, and  adjusting  their  charges  accordingly.  A  charge 
for  storekeeping  and  yard  service  to  each  machine  according 
to  the  character  of  the  work  it  handles  can  also  be  made. 

4.  The  supervision  factor  is  allocated  to  machines  on  a  per 
capita  basis,  unless  certain  machines  have  sub-foremen  over 
them,  in  which  case  such  machines  are,  of  course,  charged  with 
the  cost  of  such  supervision,  as  well  as  bearing  their  share  of 
the  general  supervision. 

5.  The  organization  factor,  including  cost  of  clerical  work, 
stationery,  messengers  and  so  forth,  is  allocated  to  machines 
on  a  per  capita  basis,  unless  there  is  special  reason  to  load  it 
on  certain  machines  more  than  on  others  owing  to  the  character 
of  the  work  they  perform,  such  as  special  lines  of  product 
requiring  greater  fuss  and  attention  on  the  part  of  the  organiza- 
tion staff. 

6.  The  machinery  factor  is  allocated  on  the  capital  investment 
value  of  each  machine.  It  includes  depreciation,  repairs  and 
cost  of  oiling  and  keeping  machines  in  working  order.  The 
depreciation  charge  is  based,  of  course,  on  the  proper  deprecia- 
tion rate  for  that  particular  kind  of  machine,  the  repair  charge 
on  experience  or  judgment  as  to  probable  repairs  on  the  aver- 
age, and  the  maintenance  charge  on  a  set  allowance  for  waste, 
oil,  etc. 

When  all  the  production  factors  have  been  allocated  among 
machines  in  this  way,  the  total  charge  against  each  is  divided 
by  the  working  hours  for  the  year,  with  the  result  that  an  hourly 
machine  rate  appears,  which  is  the  price  to  be  charged  against 
all  orders  for  the  use  of  the  machine. 

The  foregoing  is,  necessarily  a  very  brief  sketch  of  the 
mechanism  that  is  necessary  to  determine  machine  rates  on 
Method  C.  More  definite  particulars  will  be  given  in  Chaps. 
XIX  and  XX  in  the  second  part  of  this  book.  Sufficient,  however, 
has  been  said  to  show  the  broad  principle  on  which  the  method 
is  based.     It  is  that  every  item  of  expense,  save  and  except 


78        MANUFACTURING  COSTS  AND  ACCOUNTS 

direct  labor  and  direct  material,  can  be  logically  connected 
with  the  working  hours  of  productive  machines.  On  a  former 
page  it  was  suggested  that  "if  expense  is  incurred  for  the  purpose 
of  running  machines,  there  ought  to  be  some  connection  between 
its  amount  and  the  duty  of  any  machine."  From  what  has 
just  been  described,  it  will  have  been  seen  that  in  actual  fact 
there  is  such  a  connection  and  that  by  carefully  considering 
the  aim  and  end  of  each  class  of  expense  it  is  possible  to  find 
its  money  value.  It  will  also  be  understood  that  when  all  the 
machines  are  working  full  time,  then  all  the  expense  will  be  ab- 
sorbed by  Orders  through  the  device  of  charging  machine  rates 
for  the  use  of  the  machines  themselves. 

Such  charges  are  in  effect  rents.  In  some  industries,  as  for 
example,  the  shoe  manufacturing  trade,  productive  machines 
are  actually  rented  by  manufacturers  instead  of  being  purchased 
by  them.  When  the  rent  paid  for  such  machines  includes  the 
cost  of  repair  and  maintenance  by  the  renters,  then  the  rent  so  paid 
is  almost  identical  with  the  productive  machinery  factor  above, 
save,  of  course,  that  it  will  include  an  item  representing  profit 
to  the  owner.  If  now,  in  such  an  industry,  the  manufacturer 
buys  his  power  from  corporation  mains,  then  the  charge  made 
to  him  closely  represents  the  power  factor  described  above.  If 
now  he  were  to  rent  premises  for  his  work,  and  such  rents  were 
to  include  free  lighting  and  heating,  then  the  rent  so  paid  would 
closely  agree  with  the  building  factor  above  described.  The 
factors  remaining  are,  of  course,  necessarily  part  of  the  local 
expenses  of  the  business  and  could  not  very  well  be  represented 
by  a  rent  paid  to  an  outsider. 

It  will  be  seen,  therefore,  that  this  is  no  fanciful  analysis  of  ex- 
pense, but  that  it  is  merely  the  reduction  of  all  expense  to  natu- 
ral groupings,  which  are  practically  rents  paid  by  the  shop  for 
certain  definite  kinds  of  services  rendered.  Once  these  factors 
are  perceived  and  their  money  value  ascertained,  their  further 
application  to  individual  machines  requires  no  labored  argument 
to  show  its  practical  value. 

The  costing  of  product  on  Method  C  (Fig.  17)  is  on  very  similar 
lines  to  the  percentage  method  shown  in  Fig.  15.  The  only 
differences  are  these: 

The  time  on  each  order  is  taken  as  before,  but  not  only  direct 
wages  but  also  machine  charges  are  figured  on  the  Time  Sheet. 
Cost  Sheets  are  charged  accordingly.     When  the  Cost  Sheets 


COSTING  ON  METHOD  C 


79 


are  listed  in  the  Cost  Journal,  the  total  of  the  machine  rates  is 
ascertained  and  credited  to  the  Departmental  Expense  account. 
Unless  all  the  machines  have  been  working  full  time,  this  credit 


Expense  or  Burden  Journal 


Operators  and  Machine 
Time  Sheet 


(■2C0     260  J 


510     2G0  120   70     CO 


Cost  Sheet  37G 


Item  1  Amt. 

"W. 

U.K. 

Mat'lJ  bup. 

D.Mtl        60 

CO 

D.Lbr     100 

100 

M.Rntts    125 

125 

Supp. 

21 

21 

306 

100 

1^5 

60 

21 

<  >r.i.-r 

Hrs. 

Wu.-.-i 

M.IUI 

376 
377 

5 
6 

1.00 
1.20 

1.25 
1.50 

11 

2.20 

2.75 

Time  Sheet  Entries 
Posted  to  Cost  Sheet 


Cost  Sheet  377 


Item  |Amt, 

w. 

M-IUMnt'lHup. 

D.Mtl     70 

70 

D.Lbr    120 

120 

M.Kate  150 

150 

Supp. 

26 

26 

3C6 

l'JU 

i:,u 

70 

JC 

Cost  Sheet  Listed  In  Cost  Journal 

Finished  Work  Journal 


376 
etc 


306 
660 


9CC   410  345  150  CI 


I  966  j 


Balance  to  Next  Month 
Represent  Unfinished 
Orders 
Dept.  Mfg  Acct.  Dept.  Fin.  Work  Acct. 

Fig.  17. — Costing  on  Method  C.  Direct  labor  charged  to  order  numbers. 
Expense  charged  to  order  numbers  through  machine  rates.  Undistributed 
expense  (due  to  idle  machines  or  wasted  manufacturing  capacity)  prorated 
o\  er  orders  as  supplementary  rate. 


will  not  suffice  to  wipe  out  all  the  amount  standing  against 
that  account,  but  a  balance  will  be  left,  representing  undis- 
tributed expense  (i.e.  expense  that  has  not  been  distributed  to 
Orders  by  means  of  machine   rates).     The  ratio  between  this 


si)       MANUFACTURING  COSTS  AND  ACCOUNTS 

undistributed  balance  and  the  total  of  machine  rates  is  then 
ascertained,  and  prorated  over  all  orders  in  the  Cost  Journal  in 
the  column  headed  "Supplementary  Rate."  This  prorating  is, 
of  course,  also  transferred  to  the  Cost  Sheets  when  made.  In 
all  other  respects  the  two  methods  are  identical  in  their  manner 
of  working,  as  will  be  seen  by  comparing  the  diagram  Fig.  17 
with  that  of  the  percentage  method,  Fig.  15. 


CHAPTER  VI II 
THE  FINAL  STAGE   OF  COSTS 

In  the  preceding  chapters  we  have  discussed  the  three  prin- 
cipal methods  of  taking  out  departmental  costs.  In  most 
cases,  however,  businesses  consist  of  more  than  one  department, 
and  consequently  there  must  be  provided  some  mechanism  for 
unifying  or  combining  the  various  departmental  costs  so  that 
the  complete  cost  of  a  product  or  of  an  order  can  be  ascertained. 

There  are  two  ways  of  effecting  this,  and  the  selection  depends 
on  the  nature  of  the  work.  The  first  method  is  indicated  where 
the  work  done  by  departments  forms  a  regular  series,  so  that, 
commencing  with  the  direct  material,  each  department  performs 
some  operation  on  it  and  forwards  it  to  the  next  department.  In 
such  a  case  the  finished  cost  of  one  department  may  be  con- 
sidered as  the  direct  material  cost  of  the  next  department.1 
When  the  work  has  passed  through  the  whole  series  of  departments, 
the  final  cost  will  obviously  be  the  complete  cost  of  the  original 
raw  material,  plus  all  the  work  done  on  it  by  the  successive 
departmental  operations. 

If  there  is  no  such  regular  sequence  of  work  as  this,  then 
another  method  of  unifying  or  combining  departmental  costs 
must  be  adopted.  When,  for  example,  sundry  departments 
turn  out  portions  of  work  which  are  then  forwarded  to  a  central 
point  to  be  assembled  or  put  together  (machine  building  affords 
a  good  example)  or  when  work  passes  successively,  but  not  will) 
unfailing  uniformity,  through  several  departments,  then  it 
becomes  necessary  to  provide  a  mechanism  for  collecting  the 
various  departmental  costs  belonging  to  a  given  order,  so  that 
the  complete  cost  of  the  order  may  be  known. 

If  we  regard  the  matter  from  the  viewpoint  of  orders,  we  see 
that  until  the  whole  order  is  finally  completed  and  passed  into 

1  As  for  example,  the  product  of  a  foundry,  i.e.,  castings,  becomes  the  raw- 
material  of  the  machine  shop.     The  method  should  only  be  adopted  in  a 
case  similar  to  this,  viz.,  where  the  product  as  made  is  both  directly  pur- 
chaseable  and  directly  salable  at  that  stage. 
6  81 


82        MANUFACTURING  COSTS  AND  ACCOUNTS 

warehouse,  the  cost  of  the  order  at  any  month  end  may  be  scat- 
tered through  several  departments,  and  may  represent  portions 
of  the  order  in  various  stages  of  completion.  As  long,  however, 
as  each  department  is  charging  its  work  to  the  same  order 
number,  it  is  evident  that  the  whole  cost  of  the  order  will  at  some 
time  or  other  be  capable  of  unification  or  collection  into  one  total. 

This,  on  the  other  hand,  is  hardly  sufficient.  We  must  provide 
methods  of  ascertaining,  at  any  given  moment,  what  is  the  con- 
dition of  the  order,  and  how  much  money  has  already  been 
expended  on  it.  Further,  when  the  last  operation  has  been 
performed  on  it,  we  should  be  able  to  cost  the  whole  order 
promptly,  without  the  necessity  for  consulting  departmental 
accounts  for  that  purpose. 

In  the  previous  chapters,  the  cost  of  production  in  each  depart- 
ment was  charged  to  a  departmental  Manufacturing  account, 
and  the  amounts  in  this  account  were  represented  by  Cost  Sheets, 
in  themselves  representing  orders.  If  there  was  at  any  moment 
$5,000  in  Manufacturing  account,  then  also  there  would  be  $5,000 
on  the  Cost  Sheets.  Then  as  the  work  of  the  department  on  any 
order  was  completed  the  Cost  Sheet  was  withdrawn,  and  entered  on 
a  Finished  Work  Journal,  and  by  this  means  credited  to  Manu- 
facturing account  and  charged  to  a  departmental  Finished 
Work  account.  When  this  is  done,  the  department  has  no 
farther  interest  in  that  order. 

While  it  was  desirable  to  exhibit  the  clearance  of  orders  out 
of  departments  in  that  way,  for  purposes  of  illustration,  depart- 
mental Finished  Work  accounts,  would  be,  in  practice,  of  very 
little  service.  The  balance  in  the  departmental  Manufacturing 
account  is,  of  course,  of  great  significance,  since  it  shows  what 
amount  of  money  is  locked  up  in  the  shape  of  work  in  process. 
But  the  balance  in  a  departmental  Finished  Work  account  tells 
us  nothing  of  significance.  When  an  order  is  entered  there  it  is 
already  beyond  the  range  of  the  department.  Instead,  there- 
fore, of  setting  up  as  many  Finished  Work  accounts  as  there  are 
departments,  it  will  be  both  simpler  and  more  significant  to  charge 
all  finished  work  from  the  departmental  Finished  Work  Journal  to 
a  general  Finished  Work  account  embracing  all  departments. 
This  is  obviously  simpler,  and  it  is  more  significant  because  we 
have  now  one  total  for  all  work  that  has  passed  through  depart- 
ments. The  balance  in  such  an  account  will  be  represented  by 
all  the  finished  Cost  Sheets  from  all  departments. 


THE  FINAL  STAGE  OF  COSTS  83 

Any  given  order  that  is  in  course  of  manufacture,  therefore, 
is  represented  by  Cost  Sheets  in  two  places: 

1.  In  the  departments,  the  corresponding  cost  being  contained 
in  the  Manufacturing  accounts  of  the  different  departments 
concerned. 

2.  In  the  cost  office,  the  corresponding  cost  being  contained  in 
the  general  Finished  Work  account. 

Now  as  soon  as  the  final  department  has  done  its  work  on 
the  order,  and  has  passed  the  last  Cost  Sheet  through  its  Finished 
Work  Journal,  then  all  the  Cost  Sheets  will  be  in  the  cost  office, 
and  all  the  corresponding  cost  will  be  contained  in  the  Finished 
Work  account.  By  collecting  Cost  Sheets,  we  ascertain  the 
entire  cost  of  the  order  from  first  to  last. 

It  may  be  asked  why  it  is  necessary  to  take  the  cost  of  an  un- 
completed order  out  of  the  departmental  Manufacturing  accounts 
until  such  time  as  the  order  is  finished  in  all  departments.  The 
reason  is  that  where  we  set  up  Manufacturing  accounts  for 
each  department,  the  balance  in  such  accounts  should  show 
with  precision  what  is  the  value  at  cost  of  the  unfinished  work 
in  the  department  itself.  It  is  then  responsible  for  its  own 
shortcomings.  But  if  the  cost  of  work  really  finished  were  to 
be  left  in  the  departmental  account  until  other  departments 
had  done  their  share  of  work  on  the  order,  then  the  balances  in 
the  Manufacturing  accounts  would  cease  to  have  any  real 
significance.  In  such  a  case  they  might  as  well  be  consolidated 
into  one  account,  which  would  be  a  general  Manufacturing 
account  for  all  departments  together. 

By  the  plan  advocated  we  divide  work  in  process  into  two 
groups:  (1)  Work  that  has  been  completed  by  a  department; 
(2)  work  that  is  still  passing  through  the  shops,  and  as  the 
latter  items  are  kept  departmentally,  we  are  able  to  ascertain 
through  which  shops.  In  many  instances  the  knowledge  of 
how  much  work  was  in  process  in  this  department  as  compared 
with  that  department  would  be  valuable,  though  from  the 
commercial  accounting  viewpoint  it  is  not  of  great  importance. 

Figure  18  shows  the  general  idea  of  the  mechanism  just 
described.  On  the  left  we  have  four  departmental  Manufactur- 
ing accounts.  In  department  A,  the  work  is  still  in  process  and 
the  Cost  Sheet  is,  therefore,  still  in  the  department  and  has  not 
yet  been  entered  on  the  Finished  Work  Journal.  In  depart- 
ments B,  C  and  D  all  work  on  that  order  has  been  completed. 


84        MANUFACTURING  COSTS  AND  ACCOUNTS 

The  cost,  as  per  Cost  Sheets,  has,  therefore,  been  entered  on  the 
respective  Finished  Work  Journals,  has  been  credited  to  the 
respective  Manufacturing  accounts,  and  charged  to  the  general 
Finished  Work  account.  The  amounts  thus  transferred  are 
represented  by  Cost  Sheets  withdrawn  from  the  departments. 

The  final  stage  of  costs  is  the  assembly  or  collection  of  all 
the  Cost  Sheets  belonging  to  a  single  order.     In  very  many 


Departmental  Cost  Sheets 
Still  in  Dept.  A 


Order  3870 


Departmental  Cost  Sheets 
in  Cost  Office 


Fin.  Work  Journal  Dept.  B 


B 

Order  3S70 

190 

C 
Order  3S70 

-1U 

D 

Order  3870 

ID 

Order  3870 


Fin.  Work  Journal  Dept.  C 


Order  3870  '210 


Fin.  Work  Journal  Dept.  D 


Order  3S70  40 


Manufacturing 

Accounts 
(Departmental) 

Fig.  18. — Showing  four  departments  working  on  the  same  order.  In 
department  A  work  is  still  in  progress.  In  B,  C,  and  D  it  is  completed,  and 
its  cost  in  these  departments  has  been  credited  through  the  Finished  Work 
Journal  to  the  Department  Manufacturing  account.  It  has  also  been 
charged  to  the  General  Finished  Work  account.  When  department  A's 
cost  is  similarly  transferred,  the  cost  of  the  order  as  a  whole  will  be  complete, 
and  will  all  be  represented  in  the  General  Finished  Work  account. 


cases  there  is  no  material  added  in  any  department  beyond  the 
first  departmenl  that  starts  the  product.  It  is,  therefore,  fre- 
quently possible  to  eliminate  all  reference  to  direct  material 
from  the  departmental  accounts,  leaving  these  to  deal  only 
with  direct  labor  and  with  expense,  distributed  by  one  of  the 
three  methods  described  in  previous  chapters.  In  such  case 
direct  material,   instead  of  being  charged  to  departments,  and 


THE  FINAL  STACK  OF  COSTS  85 

thence  into  costs  will  be  charged  direct  from  the  Stores  Issues 
Journal  (Fig.  8)  to  a  Material  Cost  Sheet  kept  in  the  cost  office, 
and  at  the  same  time  to  Finished  Work  account.  The  latter 
will  then  contain:  (1)  All  labor  and  expense  on  work  completed 
by  departments;  (2)  all  direct  material.  It  will  readily  be 
understood  that  this  latter  method  is  a  "short  cut,"  as  it  elimi- 
nates the  passage  of  direct  material  through  the  intermediate 
stage  of  departmental  accounts,  but  brings  it  to  the  same  place 
in  the  end. 

The  final  cost  of  an  order  will  be: 

1.  Direct  material. 

2.  Departmental  direct  labor. 

3.  Departmental  expense. 

When  all  these  have  been  collected,  and  no  more  work  remains 
to  be  done,  then  the  factory  has  no  further  interest  in  the  order, 
and  our  next  step  must  be  to  provide  mechanism  to  take  the 
cost  of  such  finished  orders  out  of  the  factory  system  of  accounts, 
and  charge  it  to  the  selling  system  of  accounts. 


CHAPTER  IX 
WASTE  AND  SPOILAGE.     SCRAP.     BYPRODUCTS 

Nearly  all  manufacturing  operations  are  accompanied  by 
waste  and  spoilage.  The  cause  may  be  either  inevitable  or 
accidental,  but  whatever  the  cause,  these  items  present  some 
of  the  most  annoying  and  complex  problems  with  which  the 
cost  accountant  has  to  deal. 

Waste  is  not  quite  the  same  thing  as  spoilage,  though  the 
line  is  hard  to  define.  Spoilage  is  always  accidental,  though 
a  certain  percentage  of  spoilage  may  be  inseparable  from  certain 
kinds  of  work,  e.g.,  castings.  Waste  on  the  other  hand  arises 
out  of  the  operations  of  manufacture  itself,  and  though  it  can 
be  foreseen,  its  amount  is  generally  a  variable  quantity. 

A  good  example  of  waste  is  afforded  by  the  process  of  cutting 
shapes  or  blanks  from  sheets  such  as  leather  hides,  cloth  bales, 
metal  strips  or  sheets,  rubber,  celluloid  sheets,  etc.  In  such 
cases  there  are  produced  out  of  a  given  sheet  so  many  good  and 
usable  blanks  and  so  much  waste,  but  just  how  much  of  each 
depends  on  certain  conditions.  The  skill  of  the  operator,  and 
the  condition  of  the  hide  or  sheet  will  vary  to  a  certain  degree, 
sufficiently  so  to  make  the  output  of  blanks  from  a  given  number 
of  hides  or  sheets  a  varying  quantity. 

In  other  industries,  waste  occurs  by  reason  of  shrinkage 
of  material,  by  evaporation  of  moisture,  by  ejection  of  sediments, 
scums,  and  so  forth,  at  various  stages  of  the  work. 

Spoilage  means  imperfect  work.  In  this  case  there  is  nearly 
always  a  loss  of  labor  and  expense  as  well  as  of  material.  In 
a  lot  of  50  pieces  it  may  happen  that  only  45  will  ultimately 
pass  the  inspector,  the  remainder  having  fallen  by  the  way  for 
one  reason  or  another.  Breakage,  imperfect  work,  use  of  un- 
suitable material,  faults  and  flaws  in  material  are  some  of  the 
usual  reasons.  But  if  this  spoilage  occurs  midway  in  the  process 
of  producing  the  50  pieces,  then  it  is  obvious  that  the  time 
spent  on  the  production  of  the  spoiled  ones  is  rendered  valueless. 

There  are  two  main  ways  of  meeting  this  condition.  Either 
the  whole  cost  of  producing  the  lot  is  charged  against  the  45 

86 


WASTE  AND  SPOILAGE  87 

good  pieces,  with  a  credit  for  the  scrap  value  of  the  material 
thrown  out;  or,  the  missing  parts  may  be  "replaced"  and  the 
cost  of  replacing  them  charged  to  a  Spoiled  Work  account. 

This  brings  us  to  another  problem  of  the  cost  accountant, 
namely,  scrap.  Scrap  is  in  the  nature  of  a  byproduct  of  low 
grade.  The  special  feature  of  scrap  is  that  it  is  produced  in 
the  course  of  manufacture.  The  most  familiar  example  of 
scrap  is  that  produced  by  metal  cutting  tools  (turnings,  chips, 
filings).  In  the  case  of  the  blanks  cut  out  of  sheets,  hides,  etc. 
referred  to  above,  scrap  is  also  produced,  but  this  scrap  is  not 
the  waste  there  referred  to.  Such  a  process  involves  both  scrap 
and  waste — scrap  in  all  cases,  waste  when  the  material  fails  to 
yield  as  many  blanks  as  it  would  under  favorable  conditions. 
The  scrap  is  what  is  left  after  all  the  blanks  have  been  cut  out 
of  the  sheet. 

Waste  has  no  market  value.  It  represents  either  a  failure 
to  produce  standard  efficiency,  or  a  shrinkage  in  value.  Scrap, 
on  the  other  hand,  has  generally  a  market  value  though  this 
may  be  small  compared  with  the  original  cost  of  the  material. 
In  some  cases,  of  course,  where  the  material  itself  is  costly, 
scrap  is  carefully  collected.  Brass  and  copper  turnings,  and 
to  a  still  greater  extent,  filings  of  precious  metals  such  as  silver 
and  gold,  have  a  value  unaffected  by  the  form  in  which  the 
scrap  exists. 

Spoilage  has  value  only  in  as  far  as  the  spoilt  material  can  be 
classed  as  scrap.  All  the  rest  is  loss.  Very  great  values  may  be 
wiped  out  as  spoilage  by  an  unlucky  accident.  In  an  ordnance 
factory  a  large  gun  approaching  completion  was  relegated  to  the 
scrap  heap,  through  the  workman  in  a  moment  of  abstraction 
picking  up  a  wrong  pair  of  calipers,  and  making  a  cut  accordingly. 
The  gun  lies  on  the  scrap  heap,  carrying  with  it  many  thousands 
of  dollars  expended  on  it  in  the  long  series  of  processes — melting, 
casting  ingots,  forging,  tempering,  turning  and  boring  that  all 
but  brought  it  safely  to  the  final  stage.  The  scrap  value  of  a 
huge  forging  of  this  class  is  diminished  by  reason  of  the  costly 
nature  of  the  work  of  cutting  it  up  into  manageable  proportions. 

It  will  be  seen  that  waste,  spoilage  and  scrap  are  three  separate 
things : 

Waste  is  a  loss  of  quantity  of  product,  due  to  failure  to  extract 
the  most  out  of  material,  or  to  inevitable  conditions  of  manu- 
facture. 


88        MANUFACTURING  COSTS  AND  ACCOUNTS 

Spoilage  is  the  destruction  of  material  already  in  process,  and 
carries  with  it  not  only  the  value  of  the  material  spoiled,  but  also 
all  the  labor  and  expense  that  has  been  expended  on  it  up  to  the 
time  it  was  condemned. 

Scrap  is  material  of  no  use  for  the  purpose  that  the  original 
material  was  used  for.  It  may  arise  from  spoilage,  as  in  the  case 
cited  above,  but  more  usually  it  is  a  kind  of  byproduct  such  as 
cotton-waste  in  cotton-spinning,  sprues  and  gates  in  castings, 
turnings  and  filings  in  metal  working,  the  remnants  of  sheets 
from  which  all  the  possible  blanks  have  been  cut  or  stamped,  and 
so  forth.  It  should  be  noted  that  scrap  from  one  industry  is 
frequently  the  raw  material  of  another  industry.  When  this 
happens,  higher  prices  can  be  obtained  for  such  scrap  than  would 
be  possible  otherwise. 

The  distinction  between  waste,  spoilage  and  scrap  is  important 
because  their  treatment  from  an  accounting  point  of  view  is  by 
no  means  identical. 

Waste  usually  implies  that  having  paid  so  much  for  a  given 
length,  weight  or  quantity  of  raw  material,  some  of  this  disap- 
pears in  course  of  manufacture,  either  by  inferior  skill,  or  by 
inevitable  changes  of  condition,  so  that  at  the  end  of  the  series 
of  processes  we  have  less  material  than  we  started  with.  Scrap 
may  or  may  not  result  from  this  loss.  Once  we  admit  that  waste 
is  inevitable,  or  highly  probable,  then  it  follows  that  the  chief 
preoccupation  of  the  accountant  will  be  to  observe  whether  it  is, 
in  any  given  instance,  greater  or  less  than  may  be  reasonably 
expected. 

This  in  turn  opens  the  way  to  two  distinct  views  as  to  regarding 
an  increased  waste.  If  we  have  carefully  worked  out  standards 
of  normal  waste,  then  the  excess  on  any  particular  occasion  can 
be  ascribed  to  preventable  causes.  In  that  case  we  may  take  the 
increased  portion  of  cost  out  of  the  Cost  Sheet  (and,  therefore,  out 
of  Manufacturing  account)  and  charge  it  to  a  special  Wastes 
account,  leaving  the  actual  cost  of  production  of  the  order  equiva- 
lent to,  or  rather  identical  with  standard  cost. 

The  object  of  doing  this  is  twofold.  First,  the  amount  of  loss 
due  to  preventable  causes  is  ascertained  separately  and  forms  a 
valuable  guide  to  the  technical  efficiency  of  the  shop;  secondly, 
standard  cost  is  substituted  for  varying  cost  in  as  far  as  variation 
in  the  amount  of  waste  affects  it.  This  is  of  value  for  commercial 
reasons. 


WASTE  AND  SPOILAGE  89 

If  there  is  scrap  produced  that  has  a  market  value,  and  if 
more  of  it  is  produced  when  waste  is  high  than  when  it  is  normal, 
then,  theoretically,  the  excess  of  scrap  should  be  credited  to  the 
Wastes  account.  Unless,  however,  the  scrap  is  really  valuable 
as  in  the  case  of  brass,  copper,  or  precious  metal,  this  is  not  worth 
doing.  Scrap  should,  of  course,  be  credited  in  all  cases  to  Manu- 
facture, but  this  is  a  question  of  excess  scrap  corresponding  to 
excess  waste. 

Spoilage  is  a  much  more  complex  affair  to  deal  with  than 
simple  waste,  since  it  involves  generally  four  elements:  loss  of 
material;  loss  of  labor  and  of  expense  on  work  done  on  the 
material;  deduction  of  residual  or  scrap  value  of  the  spoiled 
material;  replacement  of  the  spoiled  part,  and  proper  disposal  of 
the  cost  of  such  replacement. 

In  foundry  work  there  is  a  regular  percentage  of  spoiled  work, 
which  is  usually  fairly  constant  for  one  class  or  type  of  casting 
in  the  same  shop.  As  between  different  shops  the  widest  varia- 
tion exists  as  to  what  is  regarded  as  a  normal  expectation  of 
spoiled  or  "bad"  castings.  The  simplest  way  of  dealing  with 
this  particular  case  is  to  ignore  the  bad  castings.  That  is  to  say 
that  if  we  pour  10  tons  of  metal  from  the  cupola,  and  get  9  tons 
of  "good"  and  1  ton  of  "bad"  castings,  then  the  cost  of  the 
cupola  charge  and  of  the  molding  labor  and  expense  is  considered 
to  rest  on  the  9  tons  of  "good"  castings. 

This  plan  is  simple,  but  cannot  be  applied  in  every  case  of 
spoilage.  In  the  case  of  a  uniform  product  like  iron  castings 
which  are  costed  by  the  pound,  it  is  possible  to  take  the  cost  of 
production  on  the  one  side  and  over  against  it  place  whatever 
quantity  of  product  good  luck  has  actually  produced.  But  in 
other  cases,  as,  for  example,  in  machine  shops,  and  all  industries 
where  the  product  is  discrete  and  not  uniformly  reducible  to  a 
cost  per  pound,  yard,  etc.,  wholly  different  methods  must  be 
employed.  In  such  cases  when  a  piece  has  been  spoiled  it  has  to 
be  replaced,  and  the  farther  it  has  progressed  from  its  starting 
point,  the  more  loss  there  is  incurred  when  it  is  spoiled. 

If  we  have  a  lot  of  50  pieces  of  brass,  to  be  turned,  bored,  milled 
and  drilled,  and  if  five  fall  out  at  the  turning  stage,  four  while 
being  bored,  one  while  being  milled,  and  two  on  final  inspection 
after  the  drilling  has  been  done,  then  it  will  be  obvious  that  a 
complex  condition  exists.  If  we  ignored  the  pieces  that  dropped 
out,  and  simply  considered  the  39  that  survived  as  the  product 


90        MANUFACTURING  COSTS  AND  ACCOUNTS 

of  the  whole  series  of  processes,  the  cost  would  have  but  little 
significance,  because  it  obviously  depends  on  the  particular 
number  of  pieces  dropping  out  at  those  particular  stages.  If  we 
had  a  second  lot  of  50  pieces,  and  six  fell  out  while  milling,  and 
five  while  drilling,  there  would  be  again  39  left,  but  an  entirely 
different  cost  would  result  because  each  piece  that  fell  out  carried 
an  average  larger  amount  of  labor  and  expense  with  it  than  on  the 
first  occasion.  It  is  evident,  therefore,  that  the  elimination  plan 
will  not  work  satisfactorily  in  such  cases. 

It  is  unfortunately  the  truth  that  to  devise  a  really  exact  plan 
is  very  difficult.  In  the  case  of  large  lots,  say  1,000  and  upward, 
it  is  fairly  easy,  but  in  the  case  of  lots  in  small  quantities  the 
processes  on  which  last  a  long  time,  say  several  hours,  it  will  be 
evident  that  a  good  deal  depends  on  the  question  at  what  part 
of  the  process  did  the  spoilage  occur?  Was  it  only  just  begun? 
Or  was  it  nearly  or  quite  complete  ?  Or  how  far  midway  between 
these  extremes?  In  heavy  engineering  work  this  becomes  a 
question  of  some  importance. 

In  practice  the  question  is  answered  as  near  as  possible.  When 
a  piece  is  condemned,  a  "replacement"  order  is  issued  to  make  a 
new  piece  up  to  the  point  at  which  the  spoiled  piece  had  reached. 
This  is  roughly  indicated,  thus: 

"Replace  cutter-bar.  Turn,  bore,  and  mill  2  hr."  When  the 
operator  has  gone  thus  far  on  the  replacement  order,  he  turns  it 
in,  and  resumes  work  on  the  original  order  number.  By  this 
means  the  cost  of  replacing  the  spoiled  part  is  ascertained  with 
fair  accuracy.  The  cost  of  the  replacement  work  is  not  charged 
to  the  original  order,  but  is  charged  to  a  special  Spoiled  Work 
account.  By  this  means  the  direct  material  for  the  replaced 
part,  the  direct  labor  of  turning,  boring  and  2  hr.  of  milling  it, 
with  the  expense  or  machine  rates  corresponding,  are  separated 
from  the  original  order.  It  only  remains  to  deduct  the  scrap 
value  of  the  material  of  the  spoiled  part,  and  this  is  deducted 
from  the  replacement  order. 

A  complete  dovetailing  is  thus  effected.  The  replacement- 
order  cost  is  considered  as  representing  the  part  that  was  origin- 
ally spoiled,  and  the  original  cost  of  that  part  remains  in  the  main 
order.  It  is  true  that  we  have  taken  away  the  spoiled  part  from 
the  main  order,  but  on  the  other  hand  we  have  given  back  a  good 
part  at  exactly  the  same  stage  of  manufacture.  The  cost  of  the 
misfortune  is,  therefore,  all  in  the  replacement  order   and  that  in 


WASTE  AND  SPOILAGE  93 

consequence  is  entitled  to  be  relieved  by  the  value  of  the  scrap 
part.  It  is  exactly  the  same  as  if  the  work  on  the  replacement 
order  had  resulted  in  turning,  and  boring  the  part,  milling  it  2 
hr.  and  then  spoiling  it. 

Scrap  is  an  easier  matter  to  deal  with.  There  are  only  two  ques- 
tions to  be  considered:  (1)  What  is  its  value?  and  (2)  What 
shall  be  credited  with  this  value?  The  cause  of  the  scrap  must, 
of  course,  be  considered.  Whenever  possible,  credit  should  be 
to  the  order  making  the  scrap.  But  this  is  rarely  possible,  save 
in  the  case  where  we  are  costing  by  whole  products.  A  scrap 
coming  from  one  kind  of  product  should  obviously  not  be  credited 
to  any  other  nor  to  a  mixed  account.  Failing  credit  to  the  order 
we  may  endeavor  to  credit  it  to  the  material  involved.  Foundry 
sprues  and  gates  are  an  example  of  this  procedure;  they  are 
credited  to  the  cupola  "pour,"  and  thus  help  to  reduce  the  cost 
of  "good"  castings. 

In  many  cases,  neither  of  these  methods  can  be  used,  since 
the  scrap  is  no  longer  identifiable  with  any  particular  class  of 
material  or  with  any  particular  order.  The  mixed  turnings  in 
a  machine  shop  are  an  example  of  scrap  of  a  very  general  nature. 
In  such  a  case,  credit  for  scrap  may  be  made  to  Profit  and  Loss 
account.  It  has  frequently  nothing  to  do  with  the  particular 
shop  in  which  it  happens  to  be  made.  It  arises  from  material 
and,  therefore,  becomes  a  byproduct  giving  rise  to  a  very  small 
but  general  revenue. 

The  operations  of  a  foundry  exhibit  all  three  classes — waste, 
spoilage  and  scrap — in  a  very  clear  manner.  To  begin  with  a 
certain  weight  of  materials  is  put  into  the  cupola,  and  part  of  this 
never  reappears.  A  shrinkage  takes  place  that  is  wholly  lost.  The 
remaining  weight  does  reappear  in  the  form  of  liquid  metal.  In 
pouring  the  liquid  metal  into  molds,  three  forms  are  produced: 
"good"  castings,  which  are  product;  "bad"  castings  which  are 
really  spoilage;  and  "sprues  and  gates"  which  are  necessarily 
produced,  but  are  of  no  use.  These  are  to  be  regarded  as  a  scrap 
byproduct. 

The  way  in  which  waste  due  to  shrinkage  is  handled  for 
accounting  purposes  in  this  case  is  to  ignore  it.  But  all  the  same 
its  amount  is  noted,  and  reduced  to  a  percentage  which  is  regarded 
as  unsatisfactory  if  it  exceeds  a  certain  figure.  By  ignoring  this 
waste,  we  have: 


92        MANUFACTURING  COSTS  AND  ACCOUNTS 

10,480  lb.     Cost  of  pig,  fuel,         10,000  lb.  of  liquid  iron. 

etc.  Waste  (4.9  per  cent.) 

Cost  of  labor. 
Expense. 

thus  ascertaining  the  cost  of  liquid  iron  actually   forthcoming, 
and  ignoring  that  which  has  shrunk  in  process  of  melting. 

This  output  of  liquid  iron  is  then  charged  to  what  results  from 
the  pouring  thus: 


Cost  of  10,000  lb.  of  liquid 
iron. 


8,000  lb.  "good"  castings. 
1,000  1b.  "bad"  castings. 
1,000  lb.  sprues  and  gates. 


The  "bad"  castings  and  the  sprues  and  gates  are  credited  at  their 
scrap  value,  leaving  the  "good"  castings  to  bear  the  remaining 
cost  of  the  liquid  iron. 

In  this  case  the  spoilage  is  of  such  a  nature  that  it  has  very 
close  relation  to  the  product  that  was  actually  extracted  from  the 
pouring.  It  is  indistinguishable  from  it,  since  if  "good"  is  more, 
"bad"  is  less,  and  vice  versa.  It  is  just  simply  a  pound  of  iron 
in  one  form  and  not  in  another.  It  can  be  taken  at  once  out  of 
the  total,  less  any  residual  value  it  may  have.  Sprues  and  gates, 
on  the  other  hand,  are  scrap  pure  and  simple,  very  similar  to 
machine  turnings.  They  are  not  interchangeable  in  any  way 
with  "good"  castings.  There  might  be  none  at  all,  without 
increasing  the  "good"  castings  by  a  single  pound.  As  a  by- 
product the  only  thing  we  have  to  consider  with  regard  to  them 
is  their  scrap  value,  and  to  what  they  should  be  credited — ob- 
viously to  the  liquid  iron  from  which  they  came.  When  this  is 
done,  cost  of  production  is  clear  of  them. 

To  sum  up  the  problems  afforded  by  waste,  spoilage  and  scrap, 
we  ma}'  say  that: 

Waste  is  something  that  disappears,  or  else  fails  to  appear. 
In  the  former  case,  what  remains  is  usually  considered  as  product, 
and  its  weight  or  amount  is  taken  as  the  basis  of  cost.  In  the 
latter  case  (instanced  by  cutting  blanks  out  of  sheets)  the  pos- 
sible minimum  may  be  taken  as  standard,  and  any  increased  unit 
cost  beyond  this  considered  as  preventable  waste,  and  so  charged. 
Or  the  amount  actually  realized  may  be  made  the  basis  of  cost. 

Spoilage  is  something  thai  is  destroyed  after  having  been 
worked  on.  It  usually  implies  loss  of  labor  and  expense  as  well 
as  of  material.     The  methods  of  handling  it  are  various,  but  the 


WASTE  AND  SPOILAGE  93 

general  principle  to  be  observed  is,  if  replaceable,  that  the  cost 
of  replacing  up  to  the  stage  at  which  the  original  spoilage  oc- 
curred shall  be  charged  to  a  Spoiled  Work  account.  If  not 
replaceable,  then  usually  the  loss  must  fall  upon  the  actual 
quantity  of  product  that  remains,  less  any  scrap  value  that  the 
spoiled  material  may  have.  This  procedure,  of  course,  increases 
the  cost  of  the  product  that  survives,  and  is  only  justifiable  if 
it  is  of  a  very  uniform  character  as  in  the  case  of  castings  cited 
above. 

Scrap  is  a  byproduct  arising  from  process  work,  or  is  the  result 
of  spoilage.  In  either  case,  a  value  must  be  put  on  it,  and  this 
value  must  be  credited  to  the  source  from  which  the  scrap  actually 
and  not  apparently,  flows,  if  this  source  is  discoverable.  Other- 
wise it  must  be  treated  as  a  credit  to  Profit  and  Loss. 

Byproducts. — In  some  cases,  notably  in  those  industries  that 
depend  on  chemical  changes  in  their  material,  part  of  the  material 
is  rejected  from  the  main  process  at  certain  stages.  If  such 
"reject"  has  no  commercial  value,  it  is  simply  waste.  As 
already  explained,  it  disappears,  and  is  of  no  further  importance 
from  the  cost  viewpoint.  On  the  other  hand,  it  may  have  a 
considerable  commercial  value.  In  soap-making,  for  example, 
during  the  process  of  mixing  and  boiling  the  ingredients,  sundry 
rejections  take  place,  some  of  these  being  run  to  the  sewer  as  of 
no  commercial  value,  but  others  are  collected  for  the  purpose  of 
recovering  one  of  the  byproducts  arising  from  the  chemical 
changes  that  have  taken  place,  namely  glycerine. 

Glycerine  is  not  directly  given  off  in  a  pure  state  from  the 
soap-kettles.  What  is  drawn  off  is  a  sweet  and  salty  water  that 
becomes  the  raw  material  of  a  fresh  set  of  processes,  ending  in  the 
recovery  of  so  much  salt,  and  so  much  pure  glycerine. 

In  cases  of  this  kind  it  will  be  evident  that  a  credit  must  be  made 
to  Manufacturing  account,  for  the  value  of  the  byproduct  re- 
covered, less,  of  course,  the  cost  of  recovery.  In  some  cases  it  is 
possible  to  determine  in  advance  the  quantity  of  byproduct  that 
exists  in  the  raw  material.  The  amount  of  glycerine  in  tallow, 
for  example,  can  be  thus  determined.  This  gives  the  option  of 
two  methods  of  procedure.  We  may  either  charge  the  whole 
cost  of  the  tallow  to  Soap-manufacturing  account  and  subse- 
quently credit  the  latter  with  the  value  of  glycerine  recovered,  or 
we  can  charge  the  glycerine  content  at  once  to  Byproduct  ac- 
count, and  the  remainder  to  Soap-manufacturing.     In  the  latter 


94        MANUFACTURING  COSTS  AND  ACCOUNTS 

case,  of  course,  no  further  credit  to  Manufacturing  account  is 
necessary  as  far  as  the  glycerine  byproduct  is  concerned. 

Mention  has  been  made  of  a  salty  constituent  of  the  liquid 
material  drawn  off  from  the  kettles.  This  may  be  used  to  illus- 
trate another  feature  of  chemical  manufacture,  rarely  met  with  in 
other  industries.  The  salt  is  actually  recovered  by  the  same 
series  of  processes  that  recover  the  glycerine.  But  it  is  not  a 
byproduct  because  it  does  not  arise  from  the  original  raw  materials 
used  for  manufacture.  It  is  added  during  the  boiling  processes, 
but  is  not  intended  to  remain  in  the  product.  It  merely  serves 
to  promote  chemical  changes,  itself  being  practically  unaltered. 
When  it  is  recovered,  therefore,  it  is  used  over  again. 

If  the  quantities  used  and  those  recovered  are  constant,  it  is 
clear  that  cost  is  not  affected.  The  salt  is  merely  carried  round 
and  round,  dissolved  at  this  stage  and  reappearing  as  a  solid  at  a 
later  stage.  But  if,  as  is  usually  the  case,  there  is  a  leakage,  and 
all  the  salt  does  not  reappear,  part  of  it  escaping  recovery,  then 
Manufacturing  account  must  be  charged  with  new  salt  introduced. 

It  will  be  seen  that  the  treatment  of  byproducts  is  practically 
the  same  as  that  of  scrap.  The  main  difference  lies  in  the  fact 
that  most  byproducts  are  subject  to  further  processes  and 
treatment  before  they  assume  commercial  form.  Two  considera- 
tions have,  therefore,  to  be  kept  in  view:  (1)  crediting  the  Manu- 
facturing account  with  the  value  of  the  reject;  (2)  keeping  costs 
of  the  further  processes  necessary  to  put  the  byproduct  in  com- 
mercial form.  Byproduct  recovery  is,  of  course,  handled  as  a 
separate  department,  for  which  the  raw  material  is  the  liquid  or 
solid  reject  thrown  out  of  the  main  process. 

The  question  of  what  price  to  put  on  the  reject  is  a  very  delicate 
one.  This  is  the  value  at  which  credit  is  made  to  Manufacturing 
account,  and  charged  to  Byproduct  account.  It  is  evident  that 
three  bases  of  charge  exist  in  some  cases,  two  always.  These 
are:  (1)  Manufacturing  account  can  be  credited  with  the  sale 
price  of  the  byproduct,  less  cost  of  recovery.  In  this  case  no 
profit  can  be  shown  by  the  byproduct  department.  (2)  No 
price,  or  a  merely  nominal  price  can  be  placed  on  the  reject, 
which  is  equivalent  to  making  a  present  of  its  raw  material  to  the 
byproduct  department,  and  enabling  it  to  show  a  profit.  Of 
course,  in  this  case  the  cost  of  the  main  product  is  increased  pro- 
portionately. This  method  is  clearly  impracticable  in  most 
instances  since  it  would  make  the  main  product  unsalably  high. 


WASTE  AND  SPOILAGE  95 

(3)  When  the  amount  of  the  byproduct  content  in  the  original 
raw  material  can  be  calculated  (as  in  the  case  of  glycerine  in 
tallow  just  mentioned)  then  a  fair  price  can  be  put  on  the  reject, 
based  on  the  relative  weight  of  the  materials  as  divided  between 
main  and  byproduct. 

Thus  if  we  buy  a  ton  of  something,  at  a  cost  of  $50,  and  by 
analysis  or  other  means  we  are  able  to  say  that  ultimately  44  per 
cent,  will  find  its  way  into  main  product  and  56  per  cent,  into 
byproduct,  then  it  is  obvious  that  $22  and  $28  are  the  respective 
sums  to  be  charged  to  main  and  byproduct  Manufacturing 
accounts,  for  each  ton  of  raw  material  purchased.  Both  main  and 
byproducts  are  then  on  their  own  merits,  and  each  will  be  able  to 
show  its  own  profits,  unaffected  by  the  others  transactions.  Of 
course,  in  such  cases,  careful  record  must  be  kept  to  ensure  that 
the  raw  material  does  actually  divide  up  in  the  proportion  fore- 
casted by  the  analysis. 


CHAPTER  X 

AUXILIARY  EQUIPMENT— DESIGNS,  PATTERNS,  MOLDS, 

JIGS,  ETC. 

In  considering  the  manufacturing  process  in  its  general  aspect, 
we  have  hitherto  considered  what  might  be  called  straight-line 
manufacturing,  in  which  the  turning  out  of  salable  product 
(including  byproduct)  is  the  only  preoccupation  of  the  manu- 
facturer. The  larger  bulk  of  industry  is  of  this  character.  But  on 
the  other  hand,  some  of  the  most  important  industries,  including 
the  great  engineering  group  in  most  of  its  branches,  have  to  face 
a  problem  of  a  wholly  different  character  to  any  yet  discussed. 
Before  they  can  proceed  with  the  straight-line  manufacture  of 
their  product,  they  have  to  provide  intermediate  appliances, 
sometimes  of  a  very  costly  character,  which  may  be  considered 
as  auxiliary  equipment  specialized  to  the  point  of  only  furnishing 
facilities  for  making  one  article,  or  perhaps  usable  for  only  one 
order. 

From  what  has  been  already  said,  in  previous  chapters,  with 
regard  to  the  manner  in  which  the  cost  of  anything  can  be  ob- 
tained (provided  that  a  special  order  has  been  issued  to  which 
all  direct  material,  direct  labor,  and  expense  are  chargeable)  it 
will  readily  be  understood  that  the  difficult  nature  of  this  problem 
of  auxiliary  equipment  does  not  lie  in  the  ascertainment  of  the 
cost  of  such  equipment.  The  making  of  a  drawing  in  the  drafting 
department,  of  a  pattern  in  (lie  pattern  shop,  or  of  a  mold  or  jig 
in  the  machine  shop  is  neither  more  nor  less  difficult  than  the 
costing  of  a  salable  article.  In  fact  any  one  of  such  articles 
might  be  made  in  the  shops  for  sale  to  a  customer  without  in  any 
way  changing  the  met  hod  of  costing  applicable  to  the  case. 

.Moreover,  to  show  that  it  is  not  the  cost  of  such  articles  that 
provides  the  difficulty  of  the  problem,  we  may  take  the  case  of  a 
business  (and  such  actually  exist)  where  such  articles  are  not 
produced  inside  the  plant  at  all,  but  are  purchased  from  the 
outside.  The  problem  is  not  in  the  least  simplified  by  this 
procedure. 

96 


AUXILIARY  EQUIPMENT  07 

The  difficulty  arises  in  the  fact  that  such  auxiliary  equip- 
ment has,  for  the  most  part,  an  indeterminate  life.  Thai  is 
to  say,  when  we  either  make  or  purchase  a  pattern,  mold,  or 
jig,  it  is  in  very  many  cases  an  almost  impossible  task  to  deter- 
mine how  often  it  will  be  used,  how  many  articles  in  which  it 
will  ultimately  be  auxiliary  in  production,  or  in  extreme  cases, 
whether  after  the  initial  use  for  a  specific  job,  it  will  ever  be 
used  again. 

If  we  had  an  order  for  100  articles,  and  to  produce  such  articles 
it  were  necessary  to  make  or  purchase  a  pattern,  a  mold,  and 
two  or  three  jigs,  and  if  we  were  sure  that  we  should  never  get 
a  similar  order,  then  the  problem  would  be  simple.  We  should 
simply  charge  all  this  auxiliary  equipment  up  to  the  order 
itself,  since  all  these  things  would  need  to  be  paid  for  out  of 
the  profit  realized  on  the  order.  Their  subsequent  relegation  to 
scrap  would  only  interest  us,  in  as  far  as  there  was  any  residual 
value  in  the  materials.  This  value,  when  ascertained,  we  should, 
of  course,  credit  to  the  order. 

But  if  we  obtain  such  an  order,  or  still  more  if  we  are  bidding 
on  such  an  order,  and  are  not  at  all  certain  whether  it  may  not 
be  followed  by  duplicate  orders  at  a  later  date  if  we  are  successful 
in  getting  the  first  one,  then  ample  room  for  indecision  exists. 
If  we  charge  to  the  estimated  cost  all  the  auxiliary  appliances 
necessary,  it  may  be  that  we  shall  not  get  the  order  at  all. 
This  will  certainly  follow  if  someone  who  already  holds  the 
trade  is  bidding  against  us,  because  he  will  certainly  not  be 
adding  the  cost  of  all  the  auxiliary  appliances  to  every  100 
articles  he  delivers.  On  the  other  hand,  if  we  go  on  the  theory 
that  our  auxiliary  appliances,  when  made,  will  serve  for  the 
reproduction  of  5,000  articles  before  they  are  worn  out,  and  if, 
for  that  reason,  we  only  add  one-fiftieth  of  their  cost  to  our  bid, 
we  shall  make  a  fair  price,  and  may  succeed  in  getting  the 
business.  But  in  that  case,  if  we  do  not  subsequently  receive 
orders,  from  time  to  time,  that  will  ultimately  amount  to  5,000 
articles,  we  shall  be  losing  money  equal  in  amount  to  the  un- 
expended value  in  the  appliances  left  on  our  hands. 

This  is  the  difficulty  which  presents  itself  in  most  cases  of 
auxiliary  equipment.  The  more  specialized  it  is,  the  more 
doubtful  is  the  solution.  In  some  cases,  where  the  appliance 
is  used  for  the  production  of  a  kind  of  product  that  is  in  itself 
the  raw  material  of  a  subsequent  process,  the  difficulty  is  very 


98        MANUFACTURING  COSTS  AND  ACCOUNTS 

considerably  diminished,  since  in  this  case,  it  is  generally  possible 
to  make  a  more  or  less  accurate  forecast,  barring  accidents  and 
unforeseen  contingencies,  of  the  probable  life  of  the  auxiliary 
item.  In  making  steel  ingots,  for  example,  the  molds  used  are 
often  very  large  and  costly,  but  the  life  of  an  ingot  mold,  that 
is  the  number  of  tons  that  it  will  produce  before  being  relegated 
to  scrap  is  fairly  well  ascertainable.  Consequently,  we  are 
enabled  to  make  a  tonnage  charge  for  the  use  of  such  auxiliary 
appliances  as  ingot  molds  that  thus  becomes  part  of  the  cost  of 
the  steel  itself. 

In  cases  of  this  kind,  the  calculation  of  a  basis  of  charge 
for  the  use  of  the  mold  is  not  a  matter  for  the  accountant.  It 
is  a  purely  technical  matter,  depending  on  a  knowledge  of  the 
facts.  But  if  such  knowledge  is  non-existent,  then  it  may  fall  to 
the  accountant  to  institute  such  records  as  will  later  furnish  a 
basis  of  fact  for  a  decision.  Such  a  record  is  not,  however,  part 
of  the  accounting  system  proper. 

We  need  not  pursue  the  subject  into  greater  detail.  The 
general  bearing  of  the  problem  is  all  that  it  is  necessary  to 
observe.     This  may  be  summed  up  as  follows: 

In  certain  industries  auxiliary  equipment  (the  things  that 
help  to  make  other  things)  is  necessary.  Its  peculiar  feature  is 
that  it  is  not  general  in  application  like  machines,  for  these 
are  used  on  one  order  after  another  indifferently,  but  auxiliary 
equipment  is  special.  This  specialization  varies  in  "degree  down 
to  cases  in  which  the  auxiliary  appliance  can  be  used  for  one 
specific  article  alone,  and  this  may  mean  for  one  order  or  its  sub- 
sequent duplicates,  if  any.  As  there  is  in  many  cases  no  positive 
information  on  the  life  of  the  appliance — that  is,  the  number  of 
times  it  will  be  used — the  utmost  caution  must  be  taken  in 
dealing  with  such  auxiliary  appliances.  The  safe  plan  is  to 
charge  thorn  up  to  orders  as  soon  as  possible,  provided  that  the 
order  will  bear  the  strain. 

In  all  industries  where  orders  are  turned  out  by  the  use  of 
auxiliary  appliances  specially  made  for  them,  the  final  cost 
of  the  order  as  disclosed  by  the  Cost  Sheet  should  show  what  has 
been  expended  for  new  auxiliary  appliances  in  connection  with 
it,  even  though  only  a  portion  of  this  expense  (or  none  of  it) 
has  been  charged  up  to  the  order. 

Wherever  auxiliary  appliances  such  as  patterns,  molds  and 
jigs  accumulate,   frequent  scrutiny  of  their  book  value  should 


AUXILIARY  EQUIPMENT  99 

be  made,  so  that  no  undue  inflation  of  assets  arises  from  the 
presence  of  items  that  have  as  a  matter  of  fact  no  certain  future 
use. 

From  the  accounting  viewpoint,  the  cost  of  all  such  auxiliary 
appliances,  whether  purchased  or  made  in  the  plant  itself, 
should  be  charged  to  special  accounts  as  soon  as  they  are  com- 
pleted. Thus  we  may  have  an  account  for  patterns,  one  for 
molds,  one  for  jigs,  etc.  Then,  whatever  portion  of  the  ex- 
penditure on  such  items  can  be  charged  to  specific  orders  should 
be  so  charged,  and  credited  to  the  account.  The  remainder  should 
be  written  down  periodically  on  some  basis  to  be  settled  after 
due  consideration  of  all  the  facts.  Where  there  are  several 
lines  of  product  which  are  being  costed  separately,  then  the 
auxiliary  appliances  should  be  classified  in  ledger  accounts 
in  the  same  way,  thus  patterns  for  product  A,  jigs  for  product 
C,  etc.  Loss  on  auxiliary  appliances,  through  non-use,  can  by 
this  means  be  confined  to  the  line  of  product  that  has  incurred  it. 


CHAPTER  XI 
SALES  AND  SELLING  EXPENSE 

It  cannot  be  too  strongly  emphasized  that  the  cost  of  manu- 
facturing a  product  and  the  cost  of  selling  it,  are  wholly  distinct, 
and  have  no  relation  to  one  another  whatever. 

In  many  industries  this  is  fairly  obvious.  In  a  large  concern 
the  factory  may  be  in  one  place  and  the  selling  department  in 
another,  so  that  there  is  a  physical  separation  of  the  two  classes 
of  effort.  But  in  other  industries,  part  of  the  factory  organiza- 
tion is  at  times  mixed  up  in  selling  operations,  as  in  the  case  of 
a  drafting  room  that  prepares  sketches  or  designs  for  submission 
by  the  selling  department  to  a  probable  customer.  Or  men  may 
be  detached  from  the  shops  for  demonstrating  purposes,  or  to 
remedy  defects  that  have  developed  when  the  goods  were  already 
in  possession  of  the  customer.  In  such  cases  there  is  an  apparent 
connection  between  the  works  and  the  selling  organization,  and 
their  relative  spheres  are  not  so  clearly  defined. 

Further,  there  is  always  a  class  of  expense  which  appears 
to  be  common  both  to  the  factory  and  the  sales  department. 
The  salaries  of  the  president,  directors,  and  perhaps  of  a  general 
manager,  the  clerks,  stationery,  lighting  and  heating  of  the 
general  offices,  the  expenditure  of  postage,  and  petty  expenses — 
all  these  seem  of  a  very  general  nature,  and  not  pertaining 
decidedly  either  to  factory  or  selling  necessities.  Even  when 
a  city  office  attends  to  the  selling,  and  is  thus  physically  separated 
from  the  factory,  these  apparently  common  expenses  may  exist, 
and  in  addition,  the  purchasing  agent,  who  obviously  exists 
for  the  sake  of  the  factory,  may  form  part  of  the  city  office 
organization. 

A  little  consideration  will  serve  to  show,  however,  that  the 
cases  are  exceedingly  rare  when  anyone  of  these  officials  is  engaged 
at  the  same  moment  on  business  pertaining  to  the  factory  and  to 
the  selling  department.  In  fact  it  is  practically  impossible  that 
this  should  be  so,  for  the  two  classes  of  transaction  cannot  meet. 
It  would  seem,  therefore,  that  the  apparently  common  nature  of 
the  expense  is  accidental,  and  arises  from  the  fact  that  managers 

100 


SALES  AND  SELLING  EXPENSE  101 

and  clerks  divide  their  attention  between  factory  and  selling 
matters,  in  much  the  same  way  as  men  in  the  shops  divide  their 
attention  between  orders.  And  the  solution  of  the  difficulty  is 
to  provide  some  mechanism  whereby  the  I  Lme  devoted  to  factory 
business  is  separated  from  that  devoted  to  selling  business. 

In  the  case  of  the  president  and  the  administrative  officers 
there  is  indeed  more  room  for  indecision  than  in  the  case  of  roul  ine 
workers.  Correspondents,  clerks  and  bookkeepers  do  definite; 
work,  which  is  capable  of  close  classification,  but  the  higher 
officials  have  large  matters  to  deal  with  embracing  the  welfare 
of  the  business  as  a  whole.  In  their  case,  therefore,  a  somewhat 
arbitrary  classification  of  their  activity  will  have  to  be  made. 

In  the  cases  cited  in  the  second  paragraph  above,  where  depart- 
ments of  the  factory  extend  assistance  to  the  selling  arm,  the 
charging  of  such  activity  to  that  arm  is  a  simple  matter  of  book- 
keeping, provided  the  exact  significance  of  each  class  of  transac- 
tion is  determined. 

The  first  step,  therefore,  in  organizing  the  mechanism  of  sales 
and  selling  expense  is  to  provide  a  series  of  accounts  to  which  all 
such  expense  can  be  charged.  In  addition  to  these  then;  will  be 
accounts  containing  what  might  be  called  the  raw  material  of 
sales,  namely,  the  accounts  which  contain  the  quantity  and  cost 
of  the  various  descriptions  of  product  as  turned  over  by  the 
factory  for  sale. 

In  Fig.  8  (Chap.  Ill),  typical  selling  expense  accounts  were 
enumerated  as  under: 

Advertizing  and  Catalogues. 

Salesman's  Traveling  Expense. 

Depreciation. 

Stores  Used. 

Selling  Department  Share  of  administrative  expense: 
Rent,  insurance,  etc. 
Stationery. 
Salaries. 
Sundry  Expense. 

These  accounts  are  not  exhaustive,  and  in  practice  might  be 
subdivided  to  a  greater  extent  than  shown,  but  unless  a  rigid 
analysis  of  expense  items  is  to  be  undertaken  for  the  purpose  of 
determining  how  each  such  item  was  concerned  in  the  selling 
of  individual  lines  of  product,  as  will  be  discussed  later,  there  is 
no  absolute  necessity  for  having  finely  subdivided  accounts.     If 


102      MANUFACTURING  COSTS  AND  ACCOUNTS 

all  selling  expense  is  to  be  merged  in  one  total  and  spread  evenly 
over  sales  of  all  classes,  then  a  few  general  accounts  will  serve 
the  purpose. 

Having  thus  collected  all  the  items  of  selling  expense  and  of 
cost  of  salable  goods,  the  next  step  is  to  consider  the  work  of  the 
selling  department  with  a  view  to  determine  whether  all  the 
different  kinds  of  product  are  sold  with  the  same  selling  effort, 
that  is,  at  the  same  selling  cost,  or  whether  certain  kinds  of 
product  really  take  more  effort  to  sell,  that  is,  cost  more  to  sell 
than  others. 

If  we  find  that  it  is  the  fact  that  some  products  do  take  more 
effort  to  sell  than  other  kinds,  then  the  next  step  is  to  analyze 
our  sales  expense  in  such  a  way  as  to  determine,  if  possible,  how 
much  more  one  product  costs  to  sell  than  another.  In  other 
words,  we  seek  to  express  the  ascertained  fact  that  products  differ 
in  their  call  on  the  selling  expense,  in  dollars  and  cents. 

When  the  incidence  of  selling  expense  on  the  various  products 
has  been  ascertained,  we  are  then  in  a  position  to  charge  each 
product  only  with  that  portion  of  the  selling  expense  that  it  may 
reasonably  have  been  judged  to  have  incurred.  In  the  case  of 
each  product  we  shall  then  have  the  following  data: 

1.  Factory  cost  of  product. 

2.  Add  cost  of  selling  this  product,  giving  total  cost  of  the 
product,  sold. 

3.  Deduct  from  selling  price  of  product,  giving  profit  on  this 
class  of  product. 

Ascertaining  Gross  Profit  on  Separate  Classes  of  Product.— If  our 
investigations  go  to  show  that  no  class  of  product  absorbs  more 
selling  energy  or  expense  than  any  other,  then  the  problem  is  sim- 
plified. We  need  not  go  to  the  trouble  of  analyzing  our  selling  ex- 
pense to  determine  which  items  have  been  incurred  in  the  effort  to 
sell  this  product  and  which  to  sell  that.  All  that  we  need  to  do  is 
to  total  all  the  selling  expense  and  distribute  it  to  the  different  prod- 
uct in  proportion  to  the  sales  made  of  each  class.  In  other  words,  we 
shall  charge  our  selling  expense  as  so  much  per  cent,  on  the  dollar 
of  sales,  irrespective  of  whether  the  goods  sold  were  kettles,  tongs 
or  fire-irons.  In  a  large  number  of  industries  this  simple  method 
of  charging  selling  expense  will  provide  substantially  satisfactory 
results.  In  other  cases  it  would  seriously  mislead,  and  give  rise 
to  wholly  erroneous  impressions  as  to  the  real  profitableness  of 
the  different  lines  of  product. 


SALES  AND  SELLING  EXPENSE 


103 


Figure  19  illustrates  this  simple  method  of  dealing  with  selling 
expense.  Three  different  products  A,  11  and  C  are  shown 
but  as  each  of  them  is  treated  alike,  operations  on  B  and  C 
are  omitted  from  the  diagram. 


/(2000   1300  \ 
Product  A  I 

^\  I  1000  J 

Product  B 

i/T\ 

«    \f 2000  1 

Product  C 


Sales  Journal 


Share  of  Admin 


I    60       60   1  | 

Stores  used 

I  500     500    ) 

Adytg.and  Catalogue 

I   240       240   I   I     Le8al  Expense 
\  J    |     Special  Expense 


Revenue  from 

Sources  other  than 

Trading 


Traveling  Expense 

Fig.   19. — Selling  expense  distribution. 
Note:  Selling  expense  assumed  to  bear  uniformly  on  all  products. 

The  Sales  Journal  is  ruled  with  double  columns,  providing 
for  separate  entry  of  transactions  relating  to  the  three  products. 
Each  sale  is  entered  in  the  usual  way,  in  the  order  of  com- 
pletion.    Both  the  cost  price  at  which  the  article  stands  in  the 


104      MANUFACTURING  COSTS  AND  ACCOUNTS 

Stock  account,  and  the  sale  price  payable  by  the  customer  are 
entered  against  each  sale.  At  the  month  end,  the  columns  are 
totalled,  and  charged  and  credited  as  follows: 

The  total  of  the  sale  price  column  is  charged  to  the  Control 
account  in  the  Sales  Ledger.  (The  amounts  of  each  sale  are 
also,  of  course,  individually  posted  to  the  customers  individual  ac- 
counts in  the  same  ledger.)  It  is  also  credited  to  Product  A  Sales 
account.  Then  .the  total  of  the  cost  price  column  is  credited 
to  Product  A  Stock  account,  and  charged  to  Product  A  Sales  ac- 
count.    These  transactions  can  easily  be  followed  on  the  diagram. 

By  these  postings  we  have  taken  out  the  "goods  sold"  from 
the  Stock  account  (at  cost  price)  and  have  charged  them  to 
the  customer  at  sale  price.  The  difference  between  cost  and  sale 
price,  which  represents  gross  profit  on  this  class  of  product  sold 
during  the  month,  is  found  to  be  indicated  in  the  Sales  account,  be- 
cause we  charged  that  with  cost  and  credited  it  with  sale  price, 
consequently  the  balance  must  show  the  difference  or  gross  profit. 

We  have  next  to  deduct  the  expense  of  selling  from  this  gross 
profit.  The  selling  expense  components  having  been  already 
collected  in  the  Selling  Expense  accounts  (at  the  left  of  diagram) , 
we  list  these  in  a  Closing  Journal.  We  also  enter  in  the  same 
journal  an  item  representing  the  balance,  or  gross  profit,  in 
each  of  the  product  Sales  accounts  (only  one  shown,  viz.,  product 
A).  The  various  Expense  accounts  are  then  credited  and 
their  grand  total  of  expense  charged  to  Trading  account.  The 
second  item  on  the  journal,  charges  Sales  accounts  with  the 
balances  standing  in  them  (gross  profits)  and  credits  Trading 
account  with  similar  amounts,  i.e.,  it  transfers  the  balances  in 
Sales  accounts  to  Trading  account. 

By  doing  this  we  have  assembled  all  the  gross  profits  made  on 
products  A,  B  and  C  in  the  Trading  account,  and  against  these 
profits  have  placed  the  total  of  selling  expense  incurred  in  the 
period.  As  a  result  the  balance  in  Trading  account  will  now 
show  the  net  profit  on  trading. 

A  third  entry  in  the  Closing  Journal  now  transfers  this  trading 
profit  to  Profit  and  Loss  account,  where  it  may  be  supplemented 
by  other  items  of  revenue,  such  as  rents  from  workman's  cot- 
,  income  from  investments,  etc.,  and  over  against  this  in- 
clusive revenue  may  be  set  special  expenses,  such  as  the  writing 
down  of  goodwill,  legal  expenses,  or  any  other  items  that  cannot 
be  regarded  as  the  outcome  either  of  manufacturing  or  selling. 


SALES  AND  SELLING  EXl'LXSK  105 

It  will  be  observed  that  though  the  gross  profit  on  each  prod- 
uct was  ascertained  separately,  when  it  comes  to  ascertaining 
net  profit,  the  three  products  were  consolidated,  and  selling 
expense  set  against  the  total.  Of  course,  it  would  be  possible 
to  have  three  separate  Trading  accounts,  and  divide  up  the 
expense  between  each  in  proportion  to  the  amount  of  sales  in 
each  account.  But  in  this  case,  as  each  class  of  product  is 
assumed  to  take  the  same  amount  of  selling  effort,  the  rate  of 
profit  on  each  product  will  necessarily  be  the  same,  and  nothing 
would  be  served  by  keeping  separate  Trading  accounts  for 
each  product.  Every  $100  worth  of  profit,  whether  made  on 
A,  B  or  C,  will  be  diminished  by  the  same  percentage  of  ex- 
pense. In  other  words,  the  difference  of  profitableness  between 
the  three  profits  lies  in  the  gross  profit  made  on  each,  and  the 
expense  of  selling  bears  equally  on  each  class  alike. 

This  is  by  no  means  always  actually  the  case.  In  many 
industries  the  expense  of  selling  bears  much  more  heavily  on 
one  class  of  product  than  on  another.  Under  such  circumstances 
the  above  mechanism  is  inadequate.  Separate  Trading  accounts 
must  not  only  be  kept  for  each  product,  but  the  selling  expense 
itself  must  be  subjected  to  close  analysis  to  determine  a  basis 
on  which  to  divide  it  up  between  the  different  Trading  accounts. 
This  type  of  business  must  now  be  considered. 

Ascertaining  Trading  Profit  Separately  for  Different  Classes 
of  Product. — The  first  step  must  necessarily  be  the  determination 
of  the  difference  between  one  product  and  another  in  regard 
to  the  selling  expense  incurred  by  each.  If,  for  example,  we 
are  making  a  product  like  tool-steel,  of  a  class  that  is  used 
exclusively  by  machine  shops,  and  are  also  making  another  class 
of  steel  used  only  by  edge-tool  makers,  and  if  we  are  selling  both 
these  products  direct  to  consumers  (i.e.,  not  to  merchants  who 
purchase  both  kinds  from  us),  then  it  is  not  difficult  to  see 
that  if  we  advertize  in  trade  papers  that  appeal  only  to  machine 
shops,  and  if  we  rely  on  circularizing  to  get  our  business  from 
the  edge-tool  makers,  then  we  have  here  two  classes  of  selling 
expense,  one  of  which  is  wholly  confined  to  the  first  product,  and 
the  other  to  the  second  product.  If  again,  we  have  one  traveling 
man  who  devotes  his  whole  time  to  calling  on  machine  shops  and 
another  who  calls  on  edge-tool  plants  only,  then  we  have  a 
fresh  class  of  expense  divisible  between  the  two  products  so  that 
each  gets  what  it  rightfully  incurs.     And  if  it  should  happen  that 


106      MANUFACTURING  COSTS  AND  ACCOUNTS 

one  of  these  products  was  sold  among  a  class  of  small  users  of 
no  great  financial  stability,  so  that  a  higher  percentage  of  bad 
debts  was  incurred  in  the  sales  of  this  product  than  of  the  other, 
then  again  it  would  be  manifestly  unjust  to  allow  the  latter 
product  to  bear  any  of  the  loss  due  to  the  peculiar  circum- 
stances attending  our  transactions  in  the  other. 

These  examples  could  be  multiplied,  but  sufficient  have 
been  given  to  show  the  principle  involved.  Every  item  of 
selling  expense  must  be  scrutinized  with  a  view  to  asking,  "Is 
this  expense  incurred  for  the  sale  of  any  particular  class  of 
product?"  If  it  is,  then  it  must  be  included  in  the  total  charge- 
able against  transactions  in  that  product.  When  all  the  various 
items  have  been  analyzed  in  this  way  there  will  always  be  a 
residuum  that  cannot  be  so  analyzed,  such,  for  example,  as  the 
salary  of  the  sales  manager.  Such  items  must  be  allocated  by 
judgment.  It  will  not  always  do  to  distribute  them  in  pro- 
portion to  sales  of  the  different  products,  since  it  might  very  well 
happen,  for  example,  that  a  high-priced  manager  might  be 
engaged  to  give  most  of  his  time  to  develop  business  in  one 
special  product,  which  it  was  considered  desirable  to  push. 
If  this  were  the  case,  then  that  special  product  must  be  loaded 
with  more  than  its  proportionate  share  of  the  manager's  salary. 

As  Selling  accounts  are  not  within  the  scope  of  this  work,  and 
can  only  be  briefly  considered,  we  need  only  take  note  here  that 
the  apportionment  of  selling  expense  unequally  between  products 
can  be  done  by  suitable  methods  of  analysis,  and  confine  our 
attention  at  this  point  to  the  way  in  which  it  affects  the 
accounting  mechanism. 

The  arrangements  shown  in  Fig.  19  will  not  be  affected  up  to 
and  including  the  transactions  in  the  Product  Sales  accounts,  one 
of  which  is  provided  for  each  separate  class  of  product.  Beyond 
this  point  new  arrangements  are  necessary. 

As  many  separate  Trading  accounts  will  be  required  as  there  are 
separate  Product  Sales  accounts.  The  balances  in  the  latter 
instead  of  being  transferred  to  a  common  Trading  account  as 
shown  in  Fig.  19  are  each  transferred  to  an  individual  Trading 
account  (A,  B,  or  C).  This  procedure  assembles  the  gross  profits 
on  each  line  of  product  in  a  separate  ledger  account  in  order  that 
the  individual  amount  of  selling  expense  pertaining  to  A,  thai 
pertaining  to  B  and  that  pertaining  to  C  may  be  placed  over 
against  the  individual  gross  profits  of  A,  B  and  C. 


SALES  AND  SELLING'  EXPENSE 


107 


We  thus  obtain  the  individual  net  profits  on  A,  B  and  C. 
These  individual  net  profits  are  then  transferred  to  a  common 
Profit  and  Loss  account,  just  as  shown  in  Fig.  19. 

All  that  remains  to  be  explained  is  how  the  individual  items  of 
selling  expense  pertaining  to  A,  B  and  C  are  charged  to  these 
individual  Trading  accounts.  This  is  done  by  means  of  a  special 
journal  which  takes  the  place  of  the  transactions  shown  in  the 
first  five  lines  of  the  Closing  Journal  in  Fig.  19,  assisted  by  a 
greater  subdivision  of  Selling  Expense  accounts  than  there  shown. 

The  theoretical  form  of  this  Expense  Journal  would  be  some- 
thing like  Fig.  20.  Each  item  of  selling  expense  represented  by  a 
separate  ledger  account  would  be  analyzed  here,  being  credited 
in  one  sum  to  the  Expense  account,  and  allocated  on  whatever 
basis  had  been  fixed  for  that  item  between  A,  B  and  C.  When  all 
the  items  had  been  dealt  with  in  this  way  the  total  of  column  A 

SALES   EXPENSE   JOURNAL 


CR. 

EXPENSE  ITEM 

A 

B 

C 

TOTALS 

Fig.  20. 


-Journal  for  distributing  Sales  Expense  between  three  classes  of 
product. 


would  be  charged  to  the  new  individual  Trading  account  .4, 
and  so  with  the  other  columns  (to  B  and  C,  respectively). 

A  very  close  idea  of  the  real  profits  obtained  on  each  line  of 
product,  both  gross  and  net,  would  result  if  the  analysis  of  ex- 
pense were  carried  out  with  reasonable  attention  and  skill. 

Basing  Selling  Expense  on  the  Production  Hour. — In  some 
businesses,  notably  the  printing  trade,  where  goods  are  not  made 
for  stock,  but  for  immediate  delivery  to  the  customer,  it  is  not 
unusual  to  reduce  selling  expense  to  one  sum  and  then  divide 
this  sum  by  the  number  of  hours  worked  by  the  plant,  so  as  to 
obtain  what  is  termed  a  "selling-hour"  or  "sold-hour."  It  is 
usually  worked  in  connection  with  costing  Method  A. 

If  we  have  a  shop  turning  out  a  simple  product  or  process,  such 
as  printing  impressions  on  paper,  then,  under  the  conditions 
suitable  for  Method  A,  we  can  express  the  cost  of  process  work  in 
that  shop  by  saying  that  it  cost  so  much  (say  $1)  per  hour.  If  a 
certain  order  has  taken  3  hr.,  then  its  shop  or  departmental  cost 


108      MANUFACTURING  COSTS  AND  ACCOUNTS 

is  $3.  The  advocates  of  the  sold-hour  method  then  proceed  to 
argue  that  if  during  a  certain  period,  say  a  month,  the  cost  of 
selling  has  been  say  $100  and  the  department  has  worked  200 
hr.,  then  the  cost  of  selling  the  product  of  the  shop  is  50  cts.  per 
hour.  Adding  this  to  the  departmental  production  cost  we  have 
$1.00  +  $0.50  =  $1.50,  which  is  the  cost  of  the  product  sold. 

Such  a  method  of  procedure  is  extremely  fallacious  except 
under  conditions  when  Method  A  is  a  correct  method  of  costing, 
and  in  addition  where  selling  transactions  were  very  uniform  in 
character.  As  will  readily  be  seen  it  is  an  averaging  method,  all 
expenses  both  within  and  without  the  shops  being  reduced  to  an 
average  cost  per  hour.  It  is  therefore  subject  to  the  objections 
to  all  averaging  methods,  namely,  that  they  are  incorrect  just  in 
proportion  as  actual  conditions  are  not  uniform.  For  a  small 
jobbing  business  where  orders  are  sought  day  by  day  by  one  or 
more  town  travelers,  and  do  not  greatly  differ  in  amount,  such  a 
system  gives  sufficiently  close  results.  But  for  plants  of  con- 
siderable size,  with  a  varied  description  of  equipment  and  of 
output  it  cannot  be  recommended. 

Grouping  of  Sales  Otherwise  than  by  Products. — Though  the 
analysis  of  sales  belongs  rather  to  commercial  than  to  manu- 
facturing accounting,  it  may  be  well  to  point  out  that  if  the  cost 
and  sale  price  of  each  individual  transaction  be  known,  it  is  pos- 
sible to  group  these  transactions  in  any  grouping  we  please.  The 
most  called  for  will  undoubtedly  be  territorial  grouping.  Each 
of  the  Sales  accounts  may,  for  example,  be  subdivided  into  City 
and  Country,  into  Domestic  and  Foreign  (if  an  oversea  business 
is  transacted),  into  Eastern,  Southern  and  Western  Territory, 
into  individual  State  groups,  and  so  forth.  In  a  large  business 
this  is  highly  desirable,  as  it  facilitates  the  division  of  posting 
between  several  bookkeepers.  To  do  this,  separate  Sales  Jour- 
nals are  kept  corresponding  to  groups  of  divisions,  or  alterna- 
tively, instead  of  allocating  sales  to  different  product  columns, 
they  may  be  allocated  to  different  territorial  columns. 

By  an  intelligent  grouping  of  data,  the  most  valuable  in- 
formation on  the  course  of  business  is  obtained  as  a  byproduct  of 
the  actual  accounting.  Decrease  or  increase  in  the  volume  of 
sales  in  the  aggregate  can  be  rapidly  traced  down  to  the  sources, 
so  that  answers  to  the  questions,  "In  what  line  of  product" 
and  '  In  what  localities"  is  the  increase  or  decrease  taking  place? 
are  forthcoming  without  research. 


CHAPTER  XII 
SUMMARIZING  THE  RESULTS  OF  A  BUSINESS  PERIOD 

In  the  previous  chapter  the  accounting  mechanism  was  carried 
to  the  point  of  ascertaining  the  net  trading  profit  on  the  business 
as  a  whole,  or  alternatively,  the  separate  trading  profits  on  two 
or  more  individual  lines  of  product.  We  have  now  to  consider 
the  final  mechanism  by  which  the  condition  of  the  whole  business 
is  exhibited  at  the  end  of  a  period,  and  contrasted  with  the 
performances  of  past  periods,  and  also  sometimes  with  previous 
expectations  as  to  what  would  happen  in  the  period  itself. 

In  reviewing  the  changes  that  have  taken  place  in  a  given 
period,  say  a  month,  we  may  regard  the  matter  from  two  points  of 
view:  First,  the  fact  that  the  Trading  account  or  accounts 
exhibit  a  balance  on  the  credit  side,  which  is  profit;  secondly, 
the  nature  of  the  transformations  that  have  taken  place  in  the 
various  forms  of  our  property — cash  having  progressed  through 
the  stage  of  purchases,  materials,  manufacturing  operations, 
product,  sales,  and  so  back  to  cash  again. 

This  cycle  of  changes,  however,  is  never  complete  as  a  whole. 
We  begin  the  first  period  of  our  business  with  cash  only,  it  is 
true,  but  at  no  subsequent  period  do  we  ever  find  ourselves 
in  possession  of  cash  alone,  unless  indeed  the  business  is  sold. 
Always  at  the  end  of  a  period,  our  property  which  once  was  cash, 
is  present  in  a  variety  of  forms:  buildings,  machinery,  store  of 
materials,  work  in  process,  stock  of  finished  goods,  debts  owing 
to  us,  and  some  cash.  This  being  the  case  it  is  also  obviously  true 
that  at  the  beginning  of  any  period  after  the  initial  period,  our 
property  is  similarly  represented  by  value  in  a  variety  of  forms. 

In  order  to  fully  understand  the  situation,  therefore,  it  is 
necessary  for  us  to  consider  the  forms  of  our  property  at  the 
beginning  of  a  period  and  contrast  them  with  the  forms  it  has 
assumed  at  the  close  of  the  period,  in  order  that  the  story  told 
by  the  Trading  account  may  not  only  be  seen  in  all  its  bearings, 
but  also  proved  to  be  true. 

For  in  order  that  a  certain  sum,  say  $4,000,  which  is  declared 
by  the  Trading  account  to  represent  profit  for  the  period,  shall 

109 


110      MANUFACTURING  COSTS  AND  ACCOUNTS 

be  accepted  as  being  really  profit,  we  have  first  to  make  sure  that 
our  property  during  the  period  has,  in  actual  fact,  been  increased 
by  $4,000.  This  increase  will  hardly  ever  be  found  in  cash  alone. 
It  will  generally  be  found  in  an  increased  value  of  other  things 
as  well,  such  as  debts  owing  to  us,  stock  of  finished  goods,  stock 
of  raw  materials,  or  other  kinds  of  property.  The  increases 
in  all  these  forms  of  property  taken  together,  must  equal  the 
$4,000  declared  by  the  Trading  account  to  be  profit. 

But  our  scrutiny  of  the  forms  in  which  our  property  exists  at 
the  end  of  the  period  must  be  directed  to  something  beyond 
simple  verification  of  the  amount  of  increase.  We  must  pay  some 
attention  to  the  nature  of  the  increase,  or  in  other  words  to  the 
kind  of  property  that  has  increased  in  value,  because  as  a  practical 
matter  of  business  it  is  necessary  to  prevent  our  property  passing, 
to  too  great  a  degree,  into  " fixed"  forms,  which  will  not  be 
realizable  in  cash  at  the  proper  season. 

For  example,  on  comparing  our  property  today  with  its  status 
at  the  beginning  of  the  period,  we  might  find  that  much  of  the 
increase  was  in  raw  materials,  or  in  equipment,  or  that  an 
ominously  large  portion  of  it  was  in  debts  owing  to  us  which 
showed  no  signs  of  moving  toward  payment,  in  other  words  in 
doubtful  or  bad  debts.  This  state  of  affairs  would  discount  our 
satisfaction  at  the  fact  that  the  Trading  account  showed  a  profit 
of  $4,000,  because  the  possibility  of  getting  that  profit  in  the 
form  of  cash  (which  is  the  ultimate  aim  of  any  business  whatever) 
was  more  remote  than  might  appear  at  first  sight. 

In  order,  therefore,  that  the  manufacturer  shall  have  a  firm 
grasp  of  what  has  happened  in  his  business  during  the  period,  he 
should  be  presented  with  the  following  data,  as  promptly  as 
possible  after  the  close  of  each  month: 

Abstract  of  the  Purchase  Ledger  transactions. 

Abstract  of  the  Sold  Ledger  transactions. 

Abstract  of  the  Storekeeping  transactions. 

Abstract  of  the  Equipment  transactions. 

Abstract  of  the  Work  in  Process  transactions. 

Abstract  of  the  Finished  Stock  transactions. 

All  these  accounts  represent  movements  of  certain  kinds  of 
property,  and  their  balances  at  the  end  of  the  period  represent 
the  present  value  of  each  kind.1  In  addition  to  these  property 
accounts,  he  should  have: 

1  Purchase  ledger  balances  are,  of  course,  liability,  i.e.,  negative  property. 


SUMMARIZING  THE  RESULTS  111 

Sales  accounts. 

Trading  accounts. 

Profit  and  Loss  accounts. 

Then,  with  the  exception  of  cash,  the  balance  of  which  is  gener- 
ally known  from  day  to  day,  he  will  have  all  the  principal  items 
before  him  that  need  watching  and  comparing.  The  balances  of 
these  and  some  minor  ones  will  also  be  listed  so  that  all  the 
property  is  placed  on  one  side  and  all  the  liabilities  on  the  other. 
This  arrangement  is  called  a  Balance  Sheet,  and  its  essential 
feature  is  that  when  all  liabilities  and  all  assets  have  been  listed, 
the  two  sides  will  exactly  balance  when  the  amount  of  profit 
shown  in  Profit  and  Loss  account  is  placed  in  its  proper  position 
on  the  sheet.  This  balancing  vouches  for  the  correctness  of  the 
figures  claimed  to  be  profit. 

Mechanism  should  be  provided  for  the  comparison,  period  by 
period,  of  each  of  these  items  with  those  of  past  periods.  Graphic 
representation  of  the  rise  and  fall  of  balances  is  also  very  desirable. 

In  regard  to  each  of  the  sets  of  transactions  mentioned  above, 
the  data  supplied  will  embrace  the  following  points: 

1.  What  was  the  amount  at  the  beginning  of  the  period? 

2.  What  has  been  added  during  the  period? 

3.  What  has  been  taken  out  during  the  period? 

4.  What  is  the  amount  at  the  end  of  the  period? 

By  arranging  this  information  (which  is,  of  course,  merely  the 
recapitulation  of  the  charges,  credits  and  balances  of  ledger 
entries)  in  vertical  columns,  we  are  enabled  to  place  each  period's 
data  side  by  side  so  that  changes  can  be  readily  followed  and  their 
amounts  compared. 

Figure  21  shows  the  form  in  which  information  as  to  the  various 
property  accounts  may  be  presented.  In  each  case  the  status 
of  the  account  at  the  beginning  of  the  month,  the  total  of  charges 
that  have  been  made  to  it,  the  total  of  credits  it  has  received, 
and  its  consequent  new  status  at  the  end  of  the  month  are  stated. 
When  such  a  form  is  filled  out  to  the  extent  of  several  columns 
(months)  a  considerable  amount  of  comparative  information  is 
disclosed  by  running  the  finger  along  the  horizontal  items. 

In  Fig.  22  is  shown  a  form  which  performs  the  same  office  for 
the  Sales  and  Trading  accounts.  In  this  case  a  merged  Trading 
account  is  shown.  If,  however,  the  net  trading  profit  on  two  or 
more  separate  lines  of  profit  were  required,  separate  Trading 
accounts  would  be  provided  as  explained  on  a  previous  page. 


112      MANUFACTURING  COSTS  AND  ACCOUNTS 


Purchase  Ledger    (Accounts  Payable) 

Jah.                 Feb.             Mar. 

Apr. 

May 

June 

Accounts  Paid 
Discounts  taken 
BALANCE  FORWARI 

Total 

Bal.from  Last  Month 
Purchases  this  Month 

Total 

Sold  Ledger     (Accounts  Receivable) 

Jan.  Feb.  Mar. 


Bal.from  Last  Month 
Sales  this  Month 

Total 

Accounts  Received 
Discounts  Allowed 
BALANCE  FOEWABI 

Total 

Storekeeping 


Bal.from  Last  Month 
Stores  &  Mtl's   Purcha 

ied 

Total 

Stores  &  Mtl's  Issued 
BALANCE  FOEWABI 

Total 

Buildings,  Equipment  &c 

Jan. 


Apr. 


Bal.from  Last  Month 
Added  this  Month 

Total 

Depreciation  this  Month 
BALANCE  FORWARD 

Total 

Work  in  Process 


Bal.from  Last  Month 
Direct  Material 
Direct  Labor 
Expense  Burden 

Total 

Delivered  to  Warehous 
BALANCE  FOEWABI 

' 

Total 

Finished,    Stock  Acct.    (One  for  each  Line  of  Product) 

Jan.  Feb.  Mur.  Apr.  May 


Bal.from  Last  Month 
Delivered  from  Factor 

Total 

Sales  at  Cost 
BALANCE  FOEWABI 

i 

Total 

Fig.  21. — Form  showing  movements  of  assets  and  liabilities,  month  by 

month. 


SUMMARIZINa  THE  RESULTS 


113 


Beneath  each  of  these  forms  a  scries  of  statistical  data  could 
be  recorded  if  required.  Thus  the  Sales  accounts  could  be 
reduced  to: 

Gross  profit  per  ton,  bale,  or  pound  sold. 

Average  size  of  order. 

Average  gross  profit  per  order. 


Sales  Account,  Product  A 

Jan.  Feb. 


Apr. 


May 


June 


Arnt.of  Sales  at  Cost 
Bal^GROSS  PROFIT 

Total 

Sales  at  Sale  Price 

Total 

Sales  Account, 

Product  B 

Jan.            Feb. 

Mar. 

Apr. 

May 

Juno 

Amt  of  Sales  at  Cost 
Bal.=GROSS  PROFIT 

Total 

Sales  at  Sale  Price     | 

Total 

Sales  Account,  Product  C 

Jan.  Feb. 


Apr. 


Amt  of  Sales  at  Cost 
BaI.=GROSS  PROFIT 

Total 

Sales  at  Sale  Price 

Total 

Trading  Account     (All  Products) 

Jan.  Feb.  Mar. 


Apr. 


May 


Sales  Expense,  Viz:- 
Salaries  and   Wages , 
Office  Expenses 
Traveling  Exp. 
Etc.  Etc. 
Bal.=NET  PROFIT 

< 

Total 

Gross  Profit  on  A. 

B 

C 

Total 

Fig.  22. — Comparative  monthly  statement  of  gross  profits  in  three  lines  of 
product,  and  total  net  profit. 

If  separate  Trading  accounts  for  each  line  of  product  were 
provided  for  the  reasons  already  discussed,  similar  information 
could  be  worked  out  for  net  profits,  thus: 

Net  profit  per  ton,  bale,  or  pound  sold. 

Average  net  profit  per  order. 

Such  figures  would  have  very  little  purpose  if  gotten  out  for  a 


114      MANUFACTURING  COSTS  AND  ACCOUNTS 

single  month  only,  but  if  worked  out  over  a  series  of  months,  and 
arranged  in  columnar  form,  so  that  variations  from  month  to 
month  were  easily  comparable,  information  would  be  furnished 
as  to  the  trend  of  trade,  and  whether  it  was  maintaining  or 
changing  its  character,  that  would  be  very  useful. 

These  forms  complete  the  strictly  manufacturing  and  trading 
transactions  of  the  business,  but  we  have  yet  to  collect  other  items 
of  revenue  not  proceeding  from  trading,  and  against  them  we  have 


Profit  &  Loss  Account 

Jan. 


Mar. 


Apr. 


May 


Legal  Expenses 
Goodwill  Written  Off 
Fire  Loss  Written  Off 
Bal.  = SURPLUS 

Total 

Net  Profit  for  Tdg.Acct 
Revenue  from  Invest'i 
Other  Revenue 

Total 

Balance    Sheet 


Apr. 


May 


Casb  in  Hand  and  Bank 
Accounts  Receivable 
Stores  &  Materials 
Work  in  Process 
Unsold  Fin.  Stock 
Buildings,  Plant  &c 
Investments 

Total 

Accounts  Payable 

Capital  Account 

SURPLUS 

Total 

Fig.  23. — Comparative  monthly  profit  and  loss  account  and  balance  sheet. 


to  set  such  special  expenses  as  must  be  met  from  the  profits  of  the 
business,  and  are  not  fairly  chargeable  either  to  manufacturing 
or  selling  expense.  Examples  of  these  are  the  cost  of  litigation, 
the  reduction  of  goodwill  or  patent-rights,  the  writing  down  of 
fire  losses  not  covered  by  insurance  and  so  forth. 

Figure  23  gives  the  form  for  assembling  these  items  month 
by  month,  for  comparative  purposes.  The  revenue  from 
trading  and  the  amounts  written  off  from  one  month  to  another 
are  clearly  visible.     So  also  is  the  net  result  of  all,  namely,  the 


SUMMARIZING  THE  RESULTS  115 

surplus.  This  is  the  amount  by  which,  after  every  possible  de- 
duction has  been  made,  our  total  possessions  have  been  in- 
creased. Whether  or  not  we  elect  to  regard  it  as  divisible 
profit  depends  upon  circumstances,  and  particularly  upon  the 
status  of  the  different  varieties  of  our  property.  As  a  final 
means  of  determining  our  policy  towards  surplus,  we  list  all 
our  assets  and  liabilities  in  two  divisions.  To  the  liability  side 
we  add  our  Capital  account,  which  represents  the  liability  of  the 
business  to  its  owners,  as  explained  in  Chap.  II.  Having  thus 
listed  all  our  Property  accounts  on  one  side,  and  our  Liability  ac- 
counts including  Capital  account  on  the  other,  we  add  them  up, 
and  on  extracting  the  difference  between  them,  it  should  exactly 
equal  (if  our  books  have  been  correctly  kept)  the  surplus  shown 
in  the  Profit  and  Loss  account.  By  placing  this  item  at  the 
foot  on  the  liability  side,  an  exact  balance  is  obtained,  and  the 
Balance  Sheet  balances,  thus  proving  the  correctness  of  our 
results. 

The  reason  why  surplus  is  placed  on  the  liability  side  of  the 
Balance  Sheet  merits  some  attention.  It  is  placed  there,  of 
course,  because  it  is  only  there  that  it  will  assist  a  balance, 
but  this  reason,  though  a  good  one,  does  not  explain  why  surplus 
is  a  liability. 

The  answer  will  be  found  in  the  principle  that  all  accounting 
is  based  on  the  difference  between  ownership  and  property. 
It  is  true  that  we  know  it  to  be  profit  since  that  fact  is  proved  by 
its  origin,  which  we  have  traced  from  gross  profit  on  sales, 
through  net  profit  on  trading  to  surplus  on  profit  anil  loss.  But 
we  should  still  be  obliged  to  do  the  same  thing  -even  though  we 
had  no  accounts  at  all  to  help  us  discover  the  origin  of  the 
surplus. 

Consider  what  the  Balance  Sheet  is.  It  is  not  a  record  of 
what  has  happened  in  between  dates.  It  is  a  record  of  quan- 
tities and  values  of  property  at  a  certain  date.  Now  in  listing 
our  property  and  setting  against  it  all  our  liabilities,  which 
latter  are  divided  into  liabilities  to  outside  parties  (accounts 
payable)  and  liability  to  the  owners  of  the  business  (Capital 
account),  we  find  that  we  have  more  property  than  we  have 
liabilities.  We  do  not  need  the  books  to  tell  us  this,  since  we 
can  arrive  at  the  value  of  our  property  by  count  and  valuation, 
in  other  words,  by  a  stock-taking.  It  is  more  convenient  and 
infinitely  more  speedy  to  take  it  from  the  books,  but  if  necessity 


116      MANUFACTURING  COSTS  AND  ACCOUNTS 

arises  it  can  be  obtained  otherwise.  Whichever  way  it  is  ob- 
tained we  should  still  find  that  there  was  a  difference  between 
assets  and  liabilities,  and  that,  as  a  matter  of  fact,  there  was  a 
surplus  of  assets  over  the  liabilities  set  down. 

In  other  words  our  property  has  increased  since  we  last 
observed  it. 

But  from  the  principles  laid  down,  property  must  always  be 
represented  by  ownership.  Therefore,  as  we  know  that  no 
one  outside  the  business  has  any  claims  on  it  (all  such  claims 
having  been  already  listed  as  accounts  payable)  it  follows 
that  it  must  be  owned  inside  the  business,  and  as  Capital  account 
represents  inside  ownership,  therefore,  it  is  an  item  of  exactly 
the  same  class  as  Capital  account.  Instead,  however,  of  placing 
it  at  once  with  capital,  we  keep  it  as  a  separate  item,  and  express 
its  true  status  by  placing  it  alongside  capital.  It  thus  rep- 
resents a  surplus  of  property  in  existence  but  not  represented 
elswhere  as  capital. 

Surplus  is  the  ownership  of  surplus  property.  It  is  not 
property  in  itself,  since  that  is  all  listed  on  the  assets  side  of 
the  Balance  Sheet.  It  can,  therefore,  only  represent  ownership 
in  that  portion  of  the  property  not  already  earmarked  as  owned, 
by  appearing  in  the  Capital  account. 

Many  persons  are  quite  confused  over  such  matters  as  the 
nature  of  surplus,  and  the  meaning  of  capital.  That  is  be- 
cause capital  as  the  symbol  of  ownership  is  commonly  mixed  up 
with  its  appropriation  to  individuals  through  shares,  stocks 
and  bonds..  The  latter  are,  however,  merely  devices  for  settling 
the  distribution  of  ownership  among  individuals.  The  confusion 
is  made  denser  by  the  existence  of  financial  expedients  like 
bonds,  which  appear  to  create  various  kinds  of  capital.  From 
one  standpoint  they  do,  since  the  owner  of  a  bond  does  not 
stand  in  the  same  light  as  regards  ownership  of  the  property 
of  the  business  as  does  a  stockholder.  But  actually  there  is 
only  ownership  on  the  one  side  and  property  on  the  other, 
though  for  convenience  this  ownership  is  split  up,  and  given  to 
individuals  in  unequal  degree  and  in  unequal  amount.  Still, 
when  all  the  different  kinds  of  capital  are  added  up,  they  form 
simply  a  general  total  of  ownership  which  is,  or  should  be, 
represented  by  an  equivalent  in  property. 

With  these  financial  details  we  have  nothing  to  do  save  as 
in   tin'  present  instance  where  they  may  be  invoked  to  throw 


SUMMARIZING  THE  RESULTS  117 

light  on  an  obscure  point.  Strictly  speaking  Manufacturing 
accounts  should  end  at  the  factory  gate.  The  disposal  of 
product  is  not  peculiarly  a  manufacturing  activity.  Of  course, 
product  must  be  sold,  but  there  is  no  peculiarity  about  the  sale 
of  product  by  the  manufacturer.  That  portion  of  his  business  is 
exactly  the  same  as  the  business  of  any  merchant  who  purchases 
goods  at  wholesale  and  sells  them  again.  Therefore,  in  the 
foregoing  resume"  of  manufacturing  accounts  a  good  deal  has 
been  ignored — as,  for  instance,  bill  transactions — that  may 
loom  large  in  the  selling  department  of  a  manufacturing  busi- 
ness. Such  matters  are  purely  commercial,  and  for  information 
respecting  them  some  authority  on  commercial  accounting  should 
be  consulted. 


CHAPTER  XIII 
RECAPITULATION 

The  entire  cycle  of  manufacturing  accounting  has  now  been 
traced.  Beginning  with  the  simplest  transactions  and  their 
record  in  ledger  accounts,  an  outline  has  been  given  of  all  the  more 
prominent  operations  of  purchase,  manufacture  and  sale,  as  these 
are  reflected  by  accounting  methods.  The  object  has  been  to 
introduce  the  reader  gradually  to  the  numerous  subdivisions  and 
classifications  necessary,  and  to  show  how  these  are  eventually 
consolidated  again  into  a  few  heads  and  the  accuracy  of  results 
vouched  for  by  the  Balance  Sheet. 

The  beginning  of  the  cycle  has  been  shown  to  be  purchase. 

Purchased  items,  including  wages,  salaries,  materials,  and  so 
forth,  are  first  subject  to  an  analysis  which  divides  them  into  two 
classes — manufacturing  and  selling.  An  intermediate  class,  such 
as  certain  salaries  and  office  expenses,  have  to  be  divided  between 
manufacturing  and  selling  on  an  arbitrary  basis,  after  careful 
examination  of  the  situation. 

Some  of  the  items  purchased  go  at  once  into  manufacturing; 
others  are  held  up  in  storage  until  actually  wanted  for  manu- 
facturing purposes;  others  again  are  chargeable  to  manufacturing 
by  very  small  but  continuous  increments  (depreciation). 

That  portion  of  the  purchased  items  that  is  charged  to  manu- 
facturing, has  in  its  turn,  to  undergo  separation  into  classes. 
First  we  have  direct  material,  i.e.,  material  which  actually  goes 
into  and  becomes  part  of  salable  product;  next  we  have  direct 
labor,  i.  e.,  labor  which  is  directly  applied  to  causing  changes  in 
product  itself,  mostly  by  the  aid  of  machines  and  tools;  lastly  we 
have  what  is  termed  expense,  or  indirect  expense,  or  burden,  which 
is  in  fact  nothing  but  a  remainder — what  is  left  after  deducting 
direct  material  and  direct  labor  f,rom  the  total  of  all  items  charge- 
able to  Production. 

These  three  elements  of  cost,  direct  material,  direct  labor,  and 
expense  have  to  be  connected  with  definite  quantities  or  with 
individual  items  of  product,  and  this  is  the  actual  sphere  of  cost 

118 


RECAPITULA  TION  1 19 

accounting.  The  principal  differences  between  cost  systems  lie 
in  the  methods  adopted  to  connect  these  elements  with  product. 

Direct  material  is  always  charged  to  Product,  either  to  the 
whole  quantity  of  product  turned  out  in  a  shop  during  a  month, 
or  to  some  lesser  unit  quantity  or  lot. 

Direct  labor  and  expense,  on  the  other  hand,  are  applied  to 
product  in  three  main  ways,  which  have  been  arbitrarily  called, 
in  the  foregoing  chapters,  Method  A,  Method  B  and  Method  C. 
In  each  of  these  varieties,  costing  is  applied  either  to  whole  out- 
put of  one  product,  or  of  several  products,  or  to  lesser  units  desig- 
nated by  order  numbers.  In  some  instances  costing  is  carried 
as  far  as  the  individual  part,  and  to  each  process  on  such  part. 

On  Method  A  direct  labor  and  expense  are  thrown  together  and 
charged  to  Product  on  some  time  basis,  which  may  be  the  whole 
month,  or  alternatively,  may  be  an  hour.  The  latter  plan  fur- 
nishes an  average  hourly  cost,  for  any  work  done  in  the  shop,  and 
can,  therefore,  be  applied  to  any  quantity  of  product  large  or  small. 
Where  less  than  the  whole  of  a  product  is  costed,  the  lots  are 
designated  by  order  numbers,  and  charges  are  made  to  these 
order  numbers  based  on  the  time  they  have  been  worked  on. 
Method  A  though  correct  enough  in  those  cases  to  which  can  be 
applied  has  a  very  narrow  range  of  application. 

Method  B  differs  from  Method  A  in  its  handling  of  direct  labor. 
On  this  method,  direct  labor  is  charged  direct  to  Product,  either 
the  whole  product  for  the  month,  or  any  less  quantity,  designated 
by  order  numbers.  Each  order  is  charged  with  the  actual  wages 
of  the  operative,  according  to  the  time  he  has  spent  on  such 
order.  The  expense,  on  the  other  hand,  is  reduced  to  an  hourly 
average  rate,  as  in  Method  A  and  charged  to  Orders  on  the  basis 
of  the  time  that  each  order  has  been  worked  on  by  direct  labor, 
or  alternatively,  the  total  of  expense  is  set  against  the  total  of 
direct  wages,  and  their  percentage  ascertained.  Then  every 
item  of  direct  labor  on  an  order  is  increased  by  the  amount  of  this 
percentage.  This  is  termed  "prorating"  expense  over  direct 
wages.  On  this  method  every  order  will  have,  as  its  cost:  (1) 
Direct  material;  (2)  direct  labor;  (3)  expense  based  either  on  an 
hourly  rate,  or  on  a  percentage  of  direct  labor. 

Method  C.  The  three  methods  of  costing  are,  in  fact,  three 
degrees  of  definiteness  in  the  charging  of  direct  labor  and  expense 
to  Product.  In  Method  A  both  are  averaged  and  reduced  to  a 
single  charge  per  period,  which  may  be  a  whole  month,  but  is  more 


120      MANUFACTURING  COSTS  AND  ACCOUNTS 

commonly  an  hour.  In  Method  B  we  eliminate  the  averaging 
as  regards  direct  labor,  but  retain  it  as  regards  expense.  In 
Method  C  the  averaging  method  disappears  altogether,  and  each 
order  is  charged  with  an  exact  quantity  of  expense  which  analysis 
shows  is  its  rightful  share.  On  Method  C  expense  is  subject  to 
a  thorough  analysis,  instead  of  being  thrown  together  into  one 
sum.  Each  item  is  scrutinized  from  the  viewpoint  of  "What 
has  it  been  expended  for?"  and  in  practice  it  is  found  that  all 
items  can  be  grouped  in  a  few  groups  representing  certain  indirect 
services  to  production.  This  being  ascertained,  the  next  step 
is  to  ascertain  how  much  each  order  is  benefited  by  these  indirect 
services,  and  the  answer  is  found  by  considering  that  each  service 
is  really  a  service  rendered  to  a  machine.  By  calculating  the 
total  of  all  services  chargeable  to  a  particular  machine,  we  are 
enabled  to  make  an  hourly  charge  for  the  use  of  the  machine, 
just  as  we  make  an  hourly  charge  to  Product  for  the  use  of  a  man. 

This  at  once  brings  up  a  totally  new  problem.  If  expense  is 
thus  charged  to  Orders  on  a  basis  of  machine  rates,  it  follows  that 
if  a  machine  is  idle  part  of  the  time,  the  case  is  exactly  equivalent 
to  paying  a  man  wages  and  allowing  him  to  stand  about  idle. 
In  other  words,  waste  or  loss  is  incurred.  Method  C  enables  this 
loss  due  to  idleness  of  machines  to  be  calculated  in  a  money 
equivalent.  As  each  machine  has  its  hourly  rate,  all  machine 
time  that  has  been  consumed  in  working  on  orders  can  be  totalled. 
When  this  total  is  deducted  from  the  total  charge  for  expense  to 
the  shop,  the  difference  represents  wasted  expense.  It  represents 
the  cost  of  manufacturing  capacity  that  has  not  been  used. 

In  some  cases  this  amount  can  be  charged  off  to  Profit  and  Loss. 
In  most  cases,  however,  it  is  better  to  prorate  it  over  the  actual 
machine  charges  to  each  order,  as  a  "supplementary  rate." 
Whichever  plan  is  adopted,  its  significance  remains  the  same. 
It  is  not  cost  of  production,  but  cost  of  unused  capacity  to 
produce. 

The  true  manufacturing  cost  of  an  order  is  ascertained  by 
Method  C  under  all  conditions  of  slackness  or  pressure  in  the  shop. 
Neither  of  the  other  methods  can  do  this.  As  each  of  them  is 
dependent  at  some  point  on  averaging,  their  manufacturing  cost 
necessarily  goes  up  as  work  falls  off.  On  Method  C  the  actual  cost 
of  manufacturing  remains  the  same  at  all  times,  accompanied  by 
a  supplementary  amount  that  rises  or  falls  according  as  all  the 
manufacturing  capacity  of  the  shop  is  being  wasted  or  utilized. 


RECAPITULATION  12 1 

When  the  cost  of  work  on  an  order  in  one  or  more  depart- 
ments has  been  found  by  one  of  the  foregoing  three  methods, 
then,  in  most  cases,  there  remains  the  task  of  collecting  all  the 
departmental  costs  and  identifying  them  with  a  particular  manu- 
facturing or  customer's  order.  As  each  department  finishes  its 
share  of  the  work,  it  is  credited  with  the  cost  value  of  what  it 
has  done,  and  a  Finished  Work  account  is  charged.  When  all  the 
departments  have  completed  their  share  of  work  on  an  order,  the 
cost  of  the  latter  is  credited  to  Finished  Work  account  and  is 
charged  to  a  Warehouse,  or  Finished  Goods  account.  This 
completes  the  cycle  of  purely  manufacturing  accounting.  What 
remains  has  to  do  with  the  marketing  and  selling  of  the  finished 
product. 

The  subject  of  wastes,  spoilages,  scrap  and  byproducts,  and 
also  that  of  auxiliary  equipment  such  as  patterns,  molds,  etc., 
were  briefly  discussed.  These  are  complications  that  may  arise 
under  any  method  of  costing,  but  their  presence  or  absence  has 
no  bearing  on  the  principles  hitherto  discussed.  They  are  simply 
details,  troublesome  to  handle  in  practice,  because  of  the  neces- 
sity of  tracking  down  all  their  ramifications,  which  often  are  very 
complex. 

In  regard  to  the  accounting  necessary  to  ascertain  the  profits 
on  the  marketing  of  product,  methods  of  analyzing  selling  ex- 
pense, and  of  that  portion  of  the  administration  expense  that  is 
chargeable  to  the  selling  department,  were  described.  Where 
possible,  selling  expense  should  be  analyzed  in  all  cases  where 
different  lines  of  product  are  handled,  particularly  if  different 
methods  of  marketing  them  are  in  vogue.  The  method  of 
ascertaining  gross  profit  on  each  separate  line  of  product  was 
shown,  and  the  further  developments  necessary  if,  by  analysis  of 
selling  expense,  the  net  profit  on  each  separate  line  was  also  to  be 
ascertained. 

When  this  has  been  accomplished,  the  cycle  purchase — manu- 
facture—sale has  been  completed.  It  only  remains  to  consider 
the  arrangements  necessary  to  draw  together  the  results  of  a 
month's  operations,  so  as  to  show  the  present  status  of  each  kind 
of  property  we  possess,  and  thus  verify  the  trading  profits  as 
disclosed  by  the  accounts  of  the  selling  department. 

A  series  of  reports  were  suggested,  designed  to  provide  the 
management  with  a  complete  summary  of  the  principal  trans- 
actions that  had  taken  place  during  the  month,  issuing  in  a  com- 


122      MANUFACTURING  COSTS  AND  ACCOUNTS 

plete  Balance  Sheet,  showing  the  amounts  sunk  in  the  various 
assets,  the  liabilities,  the  capital  and  the  surplus.  This  last 
amount  represents  the  degree  to  which  net  assets  have  been  in- 
creased by  the  manufacturing  and  selling  operations  of  the  period, 
added  to  any  other  items  of  revenue  that  may  have  accrued  from 
non-trading  sources. 

In  Part  II  of  this  work  the  actual  operations  will  be  considered 
in  greater  detail,  and  specimen  blanks  and  rulings  given.  In 
Part  III  the  subject  of  factory  reports  and  returns,  and  the 
circumstances  under  which  they  are  required,  and  by  whom, 
will  be  discussed. 


PART  1 1 
COST  ACCOUNTING 


CHAPTER  I 
THE  GENERAL  DIAGRAM 

The  object  of  this  book  is  to  provide  the  reader  with  an 
insight  into  the  principles  underlying  manufacturing  accounting. 
To  do  this  effectively  it  has  been  necessary  to  confine  the  treat- 
ment strictly  to  the  subject  of  accounting,  which  is  a  wholly 
distinct  matter  from  administration  though  it  touches  it  at  vari- 
ous points.  What  is  called  the  "system"  in  an  industrial  plant 
is  commonly  made  up  of  several  different  series  of  organizations, 
amongst  which  that  of  accounting  is  only  one. 

Accounting  has  primarily  to  do  with  the  recording  and  com- 
parison of  money  values.  It  analyzes  the  different  classes  of 
expenditure,  records  and  observes  their  combinations  during  the 
process  of  manufacture,  ascertains  the  cost  of  grouped  auxiliary 
activities  such  as,  for  example,  the  power  plant,  determines  the 
relations  of  these  auxiliary  activities  to  the  main  activity  of 
producing  goods,  and  finally  sums  up  the  result  of  the  whole 
process  in  the  form  of  costs — each  item  of  finished  goods  being 
connected  as  closely  as  possible  with  the  actual  cost  which  has 
been  incurred  in  making  it. 

In  the  first  part  of  this  book  a  general  idea  has  been  given  of  the 
division  of  manufacturing  accounting  into  three  sections,  namely, 
buying,  manufacturing  or  production,  and  selling.  Now  both 
buying  and  selling  exist  in  all  commercial  transactions,  and 
are  not  therefore  specially  to  be  identified  with  manufacturing 
activities.  Our  attention  must  therefore  be  directed  chiefly 
to  the  middle  one  of  these  three  divisions,  namely,  production. 
The  accounting  of  this  division  is  usually  referred  to  as  manu- 
facturing costs,  or  more  briefly,  cost  accounting.  The  chief  dif- 
ferences between  the  various  methods  of  cost  accounting  which 
we  shall  describe,  resides  in  the  amount  of  subdivision   or  detail 

123 


124      MANUFACTURING  COSTS  AND  ACCOUNTS 

required  in  the  result  and  also  in  the  way  in  which  indirect  ex- 
pense, or  as  it  is  commonly  called,  burden,  is  applied  to  the  vari- 
ous orders  or  jobs. 

When  we  consider  the  very  large  variety  of  industries  that 
exist,  it  will  be  evident  that  it  is  impossible  to  discuss  them  all, 
since  to  do  so  would  mean  not  one,  but  many  volumes.  On  the 
other  hand,  as  we  are  dealing  with  the  subject  of  manufacturing 
accounts  in  general,  and  endeavoring  to  throw  light  upon  the 
principles  upon  which  they  are  arranged,  it  will  be  equally  evident 
that  the  selection  of  any  particular  industry  as  an  example  would 
give  a  very  inadequate  treatment  of  the  subject.  It  happens, 
however,  that  though  there  is  great  variety  in  detail,  the  object 
sought,  and  the  general  methods  of  treatment,  are  much  the  same 
in  all  industries.  For  instance,  though  in  a  locomotive  shop  and 
a  knitting  mill  the  wording  and  design  of  the  various  blanks  will 
obviously  be  entirely  different,  still  there  is  a  great  similarity  in 
the  accounting  aim  which  each  of  these  industries  is  seeking, 
namely,  the  detail  cost  of  certain  processes  and  operations. 
Though  the  processes  or  operations  may  be  of  quite  a  different 
nature  and  be  known  by  entirely  different  names,  still  the  general 
result  aimed  at  is  much  the  same.  The  accountant,  therefore, 
does  not  require  an  initial  knowledge  of  the  innumerable  details 
of  a  great  variety  of  industries,  provided  he  has  a  good  grasp  on 
the  methods  by  which  values  are  analyzed  and  combined,  and  the 
result  of  operations  tabulated,  so  as  to  be  able  to  apply  these 
methods  to  any  industry  with  which  he  is  called  on  to  deal. 

In  the  present  work,  therefore,  we  shall  discuss  the  general 
framework  of  ledger  accounts  which  is  common  to  nearly  all 
kinds  of  manufacturing  business,  and  shall  present  blanks  and 
forms  which  are  typical  rather  than  specific;  and  we  shall 
endeavor  to  explain  what  is  the  general  object  of  the  blank  or 
account,  and  its  relation  to  the  general  system  of  manufacturing 
accounts,  in  such  :i  way  that  the  possibility  of  adaptations  to  suit 
particular  circumstances,  will  not  present  insuperable  difficulty. 

In  the  general  diagram  (see  folding  page  at  end  of  book)  a 
general  view  of  the  more  essential  features  of  a  system  of  cost 
accounts  is  shown.  It  should  be  explained  that  this  particular 
diagram  is  based  on  what  is  known  as  the  percentage  method  of 
applying  burden  (Method  B).  This  has  been  selected,  not  be- 
cause it  is  considered  that  this  system  is  the  best,  but  because  of 
all  systems  of  dealing  with  expense  burden,  it  is  the  most  usually 


THE  GENERAL  DIAGRAM  125 

employed,  and  will  be  most  familiar  to  the  generality  of  readers. 
Further,  as  it  is  a  very  simple  method  of  handling  burden,  it  is  for 
that  reason  very  suitable  to  be  considered  in  a  preliminary  survey 
of  the  field  of  cost  accounting. 

In  its  most  abstract  form,  cost  accounting  may  be  considered 
as  the  record  of  the  process  of  ebb  and  flow  of  quantities  and 
values  from  the  first  stage  of  purchase  to  the  last  stage  of  finished 
goods.  Near  the  left-hand  side  of  the  general  diagram  will  be 
observed  two  columns  of  symbols  representing  ledger  accounts. 
Into  these  accounts  there  is  perpetually  flowing  a  series  of  quanti- 
ties and  values,  emanating  from  the  Purchases  and  Cash  Journals 
These  quantities  and  values  may  be  regarded  as  a  flowing  tide 
running  into  the  reservoirs  represented  by  the  ledger  accounts. 
On  the  right-hand  side  of  these  accounts  the  field  of  production  is 
situated.  Here  we  have  two  principal  journals,  namely,  the 
Burden  Journal  and  the  Manufacturing  Journal,  which  serve  to 
discharge  the  reservoirs  represented  by  the  two  columns  of  ledger 
accounts  and  to  transfer  the  quantities  and  values  contained 
therein  to  new  reservoirs,  namely,  Burden  account  and  Manu- 
facturing account  respectively.  The  amount  accumulated  in 
the  Burden  account  is  itself  later  transferred  to  Manufacturing 
account  by  medium  of  a  special  column  in  the  Manufacturing 
Journal.  This  journal,  therefore,  serves  two  purposes:  first,  to 
transfer  several  items  from  the  main  ledger  accounts  to  Manu- 
facturing accounts;  and,  secondly,  to  transfer  burden  from  the 
Burden  account  to  Manufacturing  account. 

So  far  we  have  a  flood  tide  flowing  from  the  Purchases  Journal 
and  the  Cash  Journal  and  piling  itself  up  in  reservoirs  of  the 
left-hand  ledger  accounts  (which  will  usually  be  called  in  this 
book  the  "main"  accounts),  then  we  have  an  ebb  tide  flowing 
away  from  these  ledger  accounts  by  the  channel  of  the  two 
journals  just  mentioned,  and  piling  itself  up  in  the  Burden 
account  and  the  Manufacturing  account  respectively.  A  further 
transaction  is  the  ebbing  of  the  tide  from  the  Burden  account  and 
its  piling  up  in  the  Manufacturing  account,  which  now,  there- 
fore, accumulates  all  of  the  amounts  that  have  flowed  away  from 
the  main  ledger  accounts. 

Simply  to  observe  the  amount  of  this  ebb  and  flow  is  in  general 
not  sufficient  for  the  purposes  of  the  accountant.  A  peculiarity 
of  cost  accounting  is  that  it  requires  to  connect  the  amounts  piling 
up  in  Manufacturing  account  with  'particular  lots  of  goods.     The 


126      MANUFACTURING  COSTS  AND  ACCOUNTS 

mechanism  for  effecting  this  connection  is  found — first,  in  the 
series  of  production  orders1  and  component  orders  by  which  we 
identify  or  label  specific  items  of  work  and  their  subdivisions; 
and  secondly,  in  the  mechanism  for  charging  definite  items  of 
workmen's  time,  and  definite  values  of  stores  and  materials 
issued  to  particular  order  numbers  or  job  numbers.  When  the 
transactions  of  a  period,  such  as  a  month,  are  completed,  the 
whole  of  the  expenditure  in  the  shops,  both  on  burden  and  on 
direct  manufacturing,  should  be  represented  by  a  number  of 
items  entered  on  Cost  Sheets,  each  of  which  Cost  Sheets  represents 
a  particular  production  order  or  component  number.  The  difference 
between  various  systems  of  manufacturing  accounts  lies,  almost 
wholly,  in  the  way  in  which  particular  lots  of  goods — represented 
or  identified  by  production  orders  and  components — are  con- 
nected with  burden  on  the  one  hand  and  direct  manufacturing 
cost  on  the  other. 

As  each  Cost  Sheet  represents  the  time,  material  and  burden 
which  has  been  incurred  in  manufacturing  the  article  represented 
by  that  component  order  number,  and  as  every  dollar  in  the 
Manufacturing  account  must  be  represented  on  one  or  other  of  these 
sheets,  it  will  be  evident  that  upon  the  completion  of  a  component, 
we  may  withdraw  one  of  these  sheets,  and  find  upon  it  the  entire 
cost  of  that  component  to  date.  It  then  becomes  a  simple  matter 
to  enter  the  value  thus  arrived  at  on  a  new  journal,  which  is  the 
medium  for  withdrawing  the  amount  from  the  Manufacturing 
account  and  placing  it  in  a  Finished  Components  account.  We 
have  thus  again  an  ebbing  away  from  the  Manufacturing  account 
and  a  piling  up  in  a  Finished  Components  account,  representing 
a  fresh  stage  of  our  transaction. 

If  a  production  order  consists  of  20  components,  each  com- 
ponent order  representing  a  process,  or  a  number  of  processes, 
on  a  particular  part  or  component,  then  on  the  completion  of  all 
the  component  orders  contained  in  the  production  order,  we  may 
collect  all  the  Cost  Sheets,  and  having  aggregated  them,  the  total 
cost  of  the  production  order  itself  is  made  known.  This  cost  will 
be  associated  with  a  definite  quantity  of  goods,  which  may  be 

1  In  this  work  a  production  order  is  considered  to  be  the  order  issued  for 
the  manufacture  of  a  definite  quantity  of  product.  Component  orders  are 
subdivisions  of  production  orders.  In  some  industries  no  subdivision  is 
required.  Component  orders  are  then  unnecessary.  Component  orders 
are  sometimes  called  Part  orders  or  Job  orders. 


THE  GENERAL  DIAGRAM  127 

either  a  single  built-up  article  such  as  a  machine,  or  it  may  be  a 
million  pieces  of  one  kind.  Having  collected  all  the  components 
on  a  production  order,  we  are  ready  to  transfer  them  from  the 
Finished  Components  account  to  a  Finished  Goods  account. 
This  is  done  by  means  of  another  journal  called  the  Finished 
Goods  Journal.  The  total  cost  of  a  production  order  (i.e.,  the 
total  cost  of  all  its  constituent  parts)  is  entered  on  this  journal 
which  serves  as  a  medium  to  withdraw  values  from  the  Finished 
Jobs  account  and  transfer  them  to  the  Finished  Goods  account. 
This  represents  the  final  stage  in  manufacturing  cost  proper. 
All  that  is  left  is  the  question  of  sale  of  the  goods  so  produced  and 
the  selling  expense  thereby  incurred. 

If  there  are  several  lines  of  product,  that  is,  several  different 
classes  of  goods  being  manufactured  at  one  time,  it  is  convenient 
to  have  several  Finished  Goods  accounts,  each  one  correspond- 
ing with  a  particular  class  of  product.  This  being  so,  and  it 
being  remembered  a  Cost  Sheet,  or  Sheets,  exists  for  every  dollar 
recorded  in  these  accounts,  it  will  be  understood  that  when  a 
sale  is  effected,  the  cost  price  of  that  sale  can  be  very  readily 
ascertained.  This,  of  course,  means  that  the  gross  profit  on  such 
a  sale  is  easily  ascertained.  To  ascertain  the  gross  profit  for  a 
period,  say  a  month,  we  may  make  use  of  a  Sales  Journal  which 
has  two  columns,  in  one  of  which  the  cost  price,  and  in  the  other 
of  which  the  sale  price,  is  affixed  to  each  transaction.  Totalling 
these  columns  will  show  at  once  the  gross  profit  that  had  been 
made  in  any  given  period.  Frequently,  however,  this  simple 
method  is  not  considered  desirable,  inasmuch  as  it  gives  too  much 
publicity  to  facts  which  would  thus  be  too  widely  known.  To 
avoid  this  publicity  two  journals  are  made  use  of,  one  containing 
the  cost  price  and  the  other  containing  the  sale  price,  the  record 
of  transactions  being  duplicated  in  each.  This,  however,  is  a 
matter  of  detail. 

If  there  were  no  expenditure  entailed  in  making  sales,  this 
disclosure  of  gross  profit  would,  of  course,  give  all  the  informa- 
tion necessary,  but  as  a  matter  of  fact,  selling  is  usually  a  very 
costly  operation.  It  involves  not  only  a  great  amount,  but  a 
great  variety  of  expenditure.  Where  there  are  several  classes 
of  product  it  can  be  easily  understood  that  some  of  this  ex- 
penditure will  be  incurred  more  for  the  sake  of  one  product 
than  for  the  sake  of  another.  In  other  words,  the  incidence  of 
expenditure   on   products   will   not   be   equal.     It  is,  therefore, 


128      MANUFACTURING  COSTS  AND  ACCOUNTS 

necessary  to  set  up  a  mechanism  which  will  enable  us  to  as- 
certain as  nearly  as  possible  what  expenditure  belongs  to  what 
product. 

Though  this  cannot  be  done  with  precise  accuracy  in  many 
cases,  still  it  can  often  be  effected  in  a  way  that  is  worth  while, 
and  as  a  result  we  are  able  to  charge  the  different  classes  of 
product  with  the  respective  shares  of  expenditure  which  it  is 
judged  may  have  properly  incurred.  The  alternative  to  this  is 
to  prorate  selling  expense  evenly  over  sales  without  reference 
to  the  classes  of  product  dealt  with.  The  object  of  doing  this 
is,  of  course,  to  enable  us  to  ascertain  net  profits  with  regards 
to  each  different  class  of  product  we  are  selling.  When  cost  of 
manufacture  and  cost  of  selling  have  been  deducted  from  sale 
price,  then  there  is  nothing  left  but  profit,  provided  our  alloca- 
tions have  been  correctly  made. 

The  whole  course  of  the  ebb  and  flow  of  manufacturing  activity 
is  now  visible.  There  was  a  constant  flood  tide  toward  the 
purchase  reservoirs.  From  these  reservoirs  there  is  a  constant 
ebb  toward  the  shops,  with  the  result  that  values  are  constantly 
being  piled  up  in  a  new  reservoir  of  parts  in  process  of  manu- 
facture. A  third  stage  is  where  there  is  an  ebb  from  the  reser- 
voir of  parts  in  the  process  of  manufacture  and  a  flowing  tide 
toward  the  reservoir  of  parts  completed.  Then  again  there  is 
a  transfer  from  this  reservoir  of  parts  completed  to  a  reservoir 
of  orders  completed,  and  finally  a  constant  emptying  of  the 
reservoir  of  orders  completed  and  a  piling  up  in  the  accounts  of 
sales  of  goods.  This  ends  the  chain  of  productive  activities, 
but,  of  course,  there  remains  the  question  of  the  amounts  re- 
ceived by  reason  of  the  sale  of  the  goods,  and  then  division  into 
classes  of  goods,  in  each  of  which  gross  and  net  profit  must  be 
ascertained. 

Hitherto  we  have  spoken  of  a  simple,  direct  industry.  In 
many  cases,  however,  the  process  of  manufacture  is  neither 
simple  nor  direct.  Before  we  can  manufacture  goods,  it  is  very 
frequently  necessary  to  make  extensive  preparations  and  to 
construct  a  variety  of  auxiliary  appliances,  such  as  patterns, 
molds,  jigs,  fixtures,  templets,  etc.,  the  cost  of  which  must  be 
kept  quite;  distinct  from  that  of  the  goods  themselves.  As 
has  been  shown  in  Part  I,  this  necessitates  finding  and  disposing 
of  the  cost  of  such  auxiliary  appliances,  which  often  presents 
perplexing  problems  for  the  accountant.     If,  when  we  accept 


THE  GENERAL  DIAGRAM  129 

an  order  for  goods,  we  know  that  the  same  goods  will  never  be 
required  again  then  it  is  obvious  that  the  cost  of  all  the  auxiliary 
apparatus  and  appliances  must  be  recovered  in  the  sale  price  of 
the  goods.  In  such  cases,  although  the  cost  of  such  auxiliary 
appliances  should  be  ascertained  separately,  it  must  be  con- 
sidered as  part  of  the  cost  of  production  and  should  be  charged 
later  against  the  sale  price.  But  this  is  rarely  the  case.  It 
more  frequently  happens  that  when  we  put  in  hand  a  pattern  or 
jig,  it  is  with  the  expectation  of  a  future  use  for  it,  quite  apart 
from  the  immediate  order  in  hand.  Whole  classes  of  such 
appliances,  moreover,  are  entirely  secondary  in  their  nature  and 
do  not  go  directly  into  the  cost  of  product,  or  of  any  particular 
order  at  all.  Such,  for  example,  are  the  molds  used  in  casting 
steel  ingots.  The  ingot  is  only  an  intermediate  product.  It 
is  not  salable,  or  at  any  rate  it  is  not  commonly  sold,  but 
when  made,  an  ingot  may  be  charged  ultimately  to  any  one  of 
several  different  classes  of  goods  or  orders.  So  that  when  we 
cast  the  ingot,  we  are  not  prepared  to  say  what  its  ultimate 
destination  will  be.  Much  less  then  are  we  able  to  say  when  we 
put  in  hand  the  manufacture  of  a  mold,  what  will  be  the  ulti- 
mate destination  of  the  ingots  that  may  be  cast  in  it.  In  such 
cases  the  Cost  Sheet  of  the  ingot  must  bear  part  of  the  cost 
of  making  the  mold;  and  just  how  much  the  amount  of  this 
charge  should  be  is  sometimes  a  difficult  question  to  determine. 
It  depends,  obviously,  on  the  use  which  will  be  made  of  the 
mold,  that  is,  of  its  useful  life  and  this  cannot  always  be  predicted. 

A  less  formidable  problem  is  afforded  by  the  question  of  special 
forms  of  wage  remuneration,  such  as  piecework,  premium  or 
bonus.  Though  piecework  may  be  regarded  as  in  the  nature 
of  a  contract  with  the  man  at  a  certain  price  for  so  many  articles, 
it  may  also  be  regarded  as  a  case  in  which  we  pay  the  man  his 
ordinary  wages  while  he  is  doing  the  work  and  then  on  the 
completion  of  it  we  pay  a  bonus  or  difference  between  his  day 
work  earnings  and  the  total  amount  of  his  contract.  Where 
burden  is  based  upon  time,  it  is  necessary  to  ascertain  the 
number  of  hours  taken  by  the  man  on  the  work,  whether  it  is 
daywork  or  piecework.  In  such  cases,  therefore,  the  piecework 
balance  must  be  regarded  as  an  additional  payment  paid  to  the 
man  over  and  above  his  ordinary  day's  wages,  and  some  mech- 
anism has  to  be  set  up  to  bring  this  balance  into  the  Cost  Sheet. 

While  the  prime  function  of  cost  accounting  is  to  find  cost,  it 


130      MANUFACTURING  COSTS  AND  ACCOUNTS 

has  also  a  secondary  aspect  which  is  of  great  importance.  The 
administrative  success  of  manufacturing  depends  largely  on 
prompt  information  as  «to  what  is  'going  on  from  hour  to  hour, 
or  at  any  rate,  from  day  to  day  in  the  shops.  Though  the 
ultimate  object  of  cost  accounting  is  to  ascertain  the  cost  of 
finished  goods  and  to  record  this  cost  in  Cost  Sheets,  it  is 
almost  equally  important,  from  an  administrative  point  of  view, 
to  keep  in  close  touch  with  the  various  processes  of  ebb  and 
flow,  already  mentioned,  and  to  observe  closely  the  condition 
of  the  various  reservoirs,  or  ledger  accounts,  at  frequent  inter- 
vals. Moreover,  as  the  nature  of  the  information  required  by 
the  administration  is  frequently  rather  different  to  that  re- 
quired by  the  accountant,  greater  subdivision  of  information  is 
required  than  that  afforded  by  the  ledger  accounts  themselves. 
This  demand  is  met  by  what  are  termed  "reports,"  which  are 
prepared  from  day  to  day,  or  in  some  cases,  weekly  or  monthly, 
and  may  be  regarded  in  many  cases  as  a  kind  of  cross-classifica- 
tion of  the  information  which  otherwise  would  have  to  be 
extracted  from  the  ledger  accounts  themselves.  Generally 
speaking,  the  nearer  the  user  of  the  reports  is  to  the  prime 
transactions,  namely,  the  expenditure  of  wages  and  the  issue  of 
material  (that  is  to  say,  the  nearer  he  is  to  the  shops)  the  more 
important  is  it  that  information  of  this  kind  should  be  furnished 
promptly  and  at  frequent  intervals.  The  shop  foreman  is 
surrounded  by  a  multitude  of  details  and  if  anything  has  to  be 
brought  to  his  notice  so  that  he  may  make  use  of  it  intelligently, 
it  must  be  red  hot.  On  the  other  hand,  the  superintendent  and 
the  higher  officials  are  needing,  not  so  much  the  small  details 
as  general  tendencies  and  broad  results.  Information  for 
their  use,  therefore,  requires  to  be  gathered  and  presented  at 
longer  intervals,  so  that  a  better  perspective  of  the  whole  course 
of  operation  is  afforded. 

In  addition,  therefore,  to  the  general  scheme  of  accounting 
shown  in  the  general  diagram,  a  secondary  scheme  of  reports 
has  also  to  be  set  up.  This  secondary  scheme  is  generally  of  a 
much  more  individual  character  than  the  general  scheme  of 
accounting,  that  is  to  say  that  in  the  nature  of  the  reports 
which  are  afforded  to  the  executives,  one  business  differs  from 
another  much  more  than  in  the  case  of  the  general  accounting 
scheme.  The  system  of  reports,  in  other  words,  is  more  or 
less  peculiar  to  the  business  and  depends,  in  fact,  considerably  on 


THE  GENERAL  DIAGRAM  L31 

the  point  of  view  of  the  executives  and  the  way  in  which  they 
are  accustomed  to  look  at  the  facts  of  production. 

Though  strictly  speaking,  manufacturing  accounts  should 
begin  with  the  receipt  of  the  invoice,  or  other  document  repre- 
senting the  purchase  of  goods  or  services,  a  preliminary  chapter 
on  ordering  and  purchasing  has  been  given,  because  of  the  impor- 
tance of  recognizing  purchase,  in  every  case,  the  origination  of 
the  manufacturing  process.  Purchase,  however,  is  a  study  in 
itself,  and  several  excellent  works  have  been  written  dealing  with 
this  branch  of  activity.  It  has  only  been  introduced  here  to 
give  an  idea  of  its  relation  to  the  general  subject  of  costs. 


CHAPTER  U 

PURCHASE  ORDERS 

The  routine  of  purchasing  extends  from  the  first  discovery  of 
the  want  of  the  goods  or  articles  to  their  receipt,  storage,  pay- 
ment and  entry  in  ledger  accounts.  As  was  explained  in  the 
first  portion  of  this  work,  manufacturing  consists  of  a  cycle  of 
operations  which  may  be  briefly  summarized  as: 

PURCHASE— MANUFACTURE— SALES 

Purchase  is,  therefore,  the  gate  by  which  everything  enters  the 
business,  whether  materials,  equipment  or  labor;  or  services  of 
various  kinds,  such  as  advertizing,  insurance,  etc.,  rendered 
either  to  the  manufacturing  or  the  selling  division  of  the  under- 
taking. We  must  not,  therefore,  fall  into  the  error  of  regarding 
purchasing  as  having  to  do  only  with  the  ordering  of  stores  and 
materials  for  current  use,  though  in  fact  such  transactions  form 
usually  the  largest  part  of  purchasing  activities. 

The  principal  elements  of  a  purchase  are  the  following: 

1.  Specification  of  what  is  wanted. 

2.  Requisition  for  a  specific  quantity. 

3.  Official  sanction  for  the  purchase. 

4.  Obtaining  bids,  with  or  without  samples  or  guarantees. 

5.  Accepting  bid,  and  ordering. 

6.  Receipt  of  purchase,  with  or  without  examination  or  test. 

7.  Checking,  passing,  and  paying  invoice. 

8.  Entry  of  purchase  invoice  in  appropriate  journal. 

In  addition  to  these  main  stages,  some  of  which  may  be  omitted 
in  certain  classes  of  purchase,  though  always  implied,  various 
mechanisms  must  be  set  up  for  facilitating  the  checking,  tracing 
and  control  of  transactions  so  that  they  may  be  conducted  with 
the  minimum  of  labor  and  confusion. 

Specification. — The  modern  tendency  to  replace  rule  of  thumb 
in  management  by  foresight  and  exact  measurement  has  de- 
veloped the  use  of  specification.     Generally  speaking  this  may  be 

132 


PURCHASE  ORDERS  L33 

defined  as  a  clear  idea,  reduced  to  writing,  of  what  it  is  we  wish 
to  purchase.  In  some  cases  this  has  always  been  customary. 
If  we  are  about  to  write  insurance,  for  example,  a  detailed  state- 
ment of  the  nature  and  value  of  what  we  propose  to  insure  is 
absolutely  necessary.  A  lease,  or  a  deed  transferring  ownership 
of  land  are  also  examples  of  very  definite  specifications.  In 
contracting  for  the  erection  of  a  building,  specifications  have 
always  held  a  prominent  and  necessary  place.  In  purchasing 
machinery,  the  specification  may  be  simply  the  catalogue  de- 
scription of  the  machine  furnished  by  the  maker,  or  may  be 
extended  to  comprise  definite  guarantees  as  to  performance, 
power-consumption,  etc. 

Most  of  these  cases  are  concerned  with  the  expenditure  of 
considerable  amounts  at  infrequent  intervals,  but  after  all  the 
success  or  failure  of  a  business  is  much  more  likely  to  depend  on 
successful  purchase  applied  to  the  two  great  main  st  reams — labor 
and  material — which  flow  continuously  through  the  plant, 
because  inefficiency  here  is  recurrent  and  cumulative.  In 
modern  plants,  therefore,  specification  is  applied  as  far  as  possible 
to  everything  that  is  purchased,  and  not  merely  to  large  and 
infrequent  items. 

In  American  Machinist  for  Feb.  29, 1912,  is  a  very  suggestive 
paper  contributed  by  Mr.  Henry  Williams,  Naval  Constructor, 
U.  S.  N.,  describing  some  remarkable  results  obtained  by  the 
adoption  of  specifications  for  purchases,  based  on  previous  study 
of  the  purpose  for  which  the  supplies  were  required.  Tool  steel, 
which  is  purchased  in  50-ton  lots,  was  reduced  15  cts.  per  pound, 
"with  the  net  result  that  a  little  better  quality  is  secured  now,  at 
a  very  considerable  saving."  Applied  to  varnish,  a  more 
suitable  quality  was  obtained  at  a  reduction  in  price  in  many 
cases  approaching  one-half  that  formerly  paid.  Many  thousand 
dollars  were  saved  annually  by  careful  specifications  of  shellac. 
One  and  a  quarter  cents  a  pound  on  800,000  lb.  were  saved  on  the 
purchase  of  "white  zinc." 

In  private  businesses  the  figures  might  be  less  imposing  but 
equally  significant.  Specification  is  especially  desirable  in  regard 
to  staple  material,  such  as  pig  iron  in  the  case  of  a  foundry,  where 
the  efficiency  of  manufacture  may  be  seriously  affected  by  un- 
known variations  in  the  quality.  Coal,  again,  is  an  article  of  very 
variable  composition,  and  modern  firms  find  it  advisable  to  make 
their  contracts  on  a  basis  of  "calorific  values,"  that  is,  on  the  actual 


134      MANUFACTURING  COSTS  AND  ACCOUNTS 

amount  of  heat  units  as  ascertained  by  analysis,  instead  of  trust- 
ing to  trial  and  error  to  point  the  way  to  a  satisfactory  fuel. 

One  of  the  results  that  are  reached  by  a  careful  review  of 
the  whole  field  of  buying  and  its  reduction  as  far  as  possible  to 
a  series  of  specifications  is  that  of  standardization.  The  fewer 
the  varieties  of  materials  that  it  is  necessary  to  purchase,  the 
larger,  as  a  rule,  will  be  the  quantities  that  can  be  contracted 
for  at  one  time  and  the  lower  the  bids  securablc.  By  standard- 
izing material  and  by  arranging  that  designers  shall  give  first 
preference  to  the  use  of  standard  varieties  and  sizes  of  material, 
a  long  chain  of  economies  is  set  up.  Fewer  transactions  in 
requisitioning,  bidding,  ordering,  checking  and  bookkeeping  are 
involved,  less  complex  arrangements  for  storekeeping,  and 
greater  simplicity  all  round  are  the  consequences  of  a  judicious 
standardization  of  material,  instead  of  leaving  the  designer  to 
introduce  new  sizes  and  varieties  capriciously  without  a  thought 
whether  they  are  really  essential  to  the  work  in  hand. 

In  some  kind  of  businesses,  of  course,  these  remarks  do  not 
apply.  The  choice  of  material  is  strictly  conditioned  by  the 
nature  of  the  product.  Whatever  new  varieties  of  material  are 
introduced  are  called  for  by  the  customer.  Again  in  other 
businesses  the  perpetual  search  after  novelty  makes  new  varieties 
of  material  welcome  rather  than  the  reverse.  But  in  most 
engineering  types  of  business,  where  product  is  made  up  of  a 
large  number  of  parts  with  screws,  nuts,  bolts,  handwheels, 
levers  and  such  like  common  accessories,  standardization  may 
play  a  very  important  part  in  the  economy  of  production.  Also 
the  use  of  materials  which  are  already  commercially  standard- 
ize* 1,  instead  of  slight  variations  from  them,  which  variations 
have  little  or  no  technical  efficiency,  is  an  equally  important 
trial  ter. 

The  wording  of  specifications  is  a  matter  calling  for  great 
care  and  precision.  In  many  cases  a  knowledge  of  trade  customs 
in  regard  to  the  item  specified  is  necessary,  it  being  a  not  un- 
common practice  for  goods  to  be  sold  as  dozens,  gallons,  tons 
and  so  forth  when  really  the  quantities  are  somewhat  higher 
or  lower  than  appears  on  the  face.  Wherever  possible,  the 
principle  of  limits  or  margins  as  to  composition  or  dimension, 
between  which  variation  is  permissible  should  be  adopted.  If 
samples  or  test  pieces  are  required,  the  conditions  under  which 
these  are  to  be  drawn  from  the  bulk  should  be  specified.     Wher- 


PURCHASE  ORDERS  L35 

ever  any  definite  public  standard  exists,  such,  for  example,  as 
the  standard  engineering  specifications,  these  should  be  adopted 
rather  than  any  small  variation  from  them,  because  what  is 
in  general  demand  can  usually  be  procured  at  a  cheaper  rate 
than  any  individual  requirement. 

It  must  be  kept  in  mind  that  the  object  of  a  specification  ia 
not  to  obtain  the  highest  grade  product,  at  the  lowest  possible 
price;  but  to  obtain  exactly  that  grade  of  product  that  can  be 


GENERAL  MANUFACTURING  CO. 

"WORKVILLE  N.Y. 

SPECIFICATION 

No     Date 


For 


This  Specification  Consists   of  Sheets 


Body   of   Specification    Written   here 


The   material   must   pass   the   following   tests 
which    will  be   applied   by   us   on   the   delivery 
of   each    consignment. 


Fig.  24. — Standard  specification  blank. 

most  economically  used,  at  the  lowest  price.  This  frequentty 
necessitates  experiment  to  discover  what  is  the  lowest-grade 
product  that  can  be  profitably  used.  In  Mr.  Williams'  article, 
above  referred  to,  he  mentions  several  cases  in  which  experi- 
ment showed  that  the  superior  brands  of  certain  articles  pre- 
viously used  were  in  fact  wasted,  inasmuch  as  their  high  qualities 
wrere  not  being  called  on  in  the  uses  to  which  they  were  being 
put.  By  substituting  a  lower  grade,  and  rigidly  specifying  the 
requirements,  it  wTas  found  possible  to  save  considerable  sums 
without  the  slightest  sacrifice  of  efficiency. 


136      MANUFACTURING  COSTS  AND  ACCOUNTS 


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When  the  acceptance  of  material 
is  dependent  on  its  passing  specific 
chemical  or  mechanical  tests  on 
delivery,  this  fact  should  be  clearly 
brought  out,  and  the  tests  detailed 
without  ambiguity  so  that  no  dis- 
pute may  arise  in  case  of  rejection. 

Standard  specifications  should  be 
made  on  uniformly  sized  sheets 
(Fig.  24)  each  specification  being 
given  a  reference  number  and  date, 
thus : 

"  Specification  No.  5,467,  dated  Aug. 
7,  1915,  for  Lacker," 

and  may  be  manifolded,  or  printed, 
and  kept  in  vertical  files,  so  that 
copies  may  be  forthcoming  without 
delay  when  bids  are  desired.  Where 
a  specification  covers  two  or  more 
sheets,  they  should  be  bound  by  a 
strong  eyelet  in  the  top  left-hand 
corner,  and  the  number  of  sheets 
contained  in  the  specification  stated 
on  the  first  sheet  under  the  title. 
Each  specification  should,  of  course, 
bear  the  printed  title  and  address 
of  the  firm.  Where  a  number  of 
specifications  are  in  use,  a  Speci- 
fication Register  (Fig.  25)  should 
be  set  up.  This  may  be  in  loose- 
leaf  form,  each  page  being  devoted 
to  one  variety  of  specification. 
Thus,  if  several  specifications  for 
different  kinds  of  lacker  are  extant, 
one  page  will  beheaded  "Lackers" 
followed  by  the  serial  number  and 
dates  of  all  such  specifications,  with 
such  additional  descriptions  as  may 
be  desirable  for  identification. 
Superseded  specifications  would  be 
ruled  off  in  the  register  in  red  ink, 


PURCHASE  ORDERS  137 

and  all  the  outstanding  copies  removed  from  the  files.  A 
Serial  Register  is  also  desirable  and  can  be  made  by  binding 
all  specifications  as  they  are  issued  in  numerical  order,  thus 
forming  an  official  record  of  the  whole  series.  A  superseded 
specification  would  not,  of  course,  be  withdrawn  from  this 
register,  but  merely  marked  "Superseded"  and  reference  given 
to  the  new  serial  number  by  which  it  is  superseded. 

The  accountant  has  usually  very  little  to  do  with  specification, 
it  being  obviously  a  purely  technical  matter  outside  his  ex- 
perience. But  where  it  is  adopted,  it  falls  to  him  to  see  that 
due  arrangements  are  made  for  the  verification  of  deliveries  as 
being  in  accord  with  specification  before  payment  is  made  for 
the  goods. 

Purchase  Requisitions. — While  specifications  are  concerned 
with  quality  of  articles  purchased,  purchase  requisitions  have 
to  do  chiefly  with  quantity.  The  one  indicates  what  kind  of  an 
article  is  required  and  the  other  how  much  of  it.  If,  therefore, 
a  standard  specification  already  exists,  it  is  only  necessary  to 
refer  to  it  by  number  and  date  on  the  requisition,  and  add  the 
quantity  considered  to  be  required,  and  then  the  purchasing 
agent  has  all  the  data  necessary  for  him  to  proceed. 

Modern  practice  is  reducing  the  purchase  requisition  to  more 
of  a  routine  affair  than  formerly.  At  one  time  the  quantity  of 
supplies  carried  was  a  matter  of  accident,  and  the  quantity  req- 
uisitioned on  any  occasion  was  a  matter  of  haphazard  judg- 
ment. Therefore,  it  is  generally  recommended  in  old  textbooks 
that  every  requisition  be  passed  on  by  the  manager.  Nowadays 
the  quantity  of  each  kind  of  stores  that  is  to  be  kept  in  hand  is 
usually  worked  out  in  advance,  and  consequently  the  amount 
to  be  ordered  on  each  occasion  of  replenishment  is  worked  out 
also.  This  reduces  the  requisition  in  most  cases  to  a  mere 
notification  to  the  purchasing  agent  that  certain  items  of  stores 
have  fallen  below  the  minimum  limit. 

Purchase  requisitions  may  be  for  materials  that  are  produced 
in  the  plant  as  well  as  for  articles  purchased  outside.  In  this 
case,  the  quantity  to  be  ordered  from  the  shops  is  also  in  most 
cases  a  matter  of  previously  settled  routine. 

In  some  cases  purchase  requisitions  will  not  be  for  standard 
materials,  but  for  some  special  article  required  for  a  particular 
customer's  order,  or  for  a  repair  or  other  special  work  being 
carried  out  on  the  equipment  itself.     In  this  case  the  purchasing 


138     MANUFACTURING  COSTS  AND  ACCOUNTS 

agent  must  satisfy  himself  that  no  more  has  been  asked  for  than 
is  really  required  for  the  purposes  of  the  order  or  repair. 

In  a  well-planned  system  the  minimum  quantities  of  each 
article  carried  in  stock  will  have  been  fixed  with  due  regard  to  the 
normal  time  required  to  obtain  delivery  of  a  further  supply. 
Where  the  article  is  a  stock  one,  and  can  be  obtained  from  several 
sources,  a  very  small  minimum  can  be  fixed  without  risk.  But 
where  time  of  delivery  is  doubtful,  a  larger  margin  should  be 
allowed.  In  both  these  cases  the  purchasing  agent  will  proceed 
in  a  routine  manner.  But  in  the  case  of  special  material  being 
required  for  a  customer's  order,  or  any  other  purpose  that  is  not 
immediately  pressing  and  urgent,  the  requisition  should  state 
the  date  at  which  it  will  be  wanted.  Without  this  information 
the  order  might  be  placed  with  a  firm  which,  though  otherwise 
preferable,  was  really  unsuitable  by  reason  of  a  reputation  for 
not  keeping  to  promises  of  delivery. 

Purchase  requisitions  may  in  some  cases  be  very  urgent,  as, 
for  examples,  in  breakdowns,  or  where  by  failure  of  the  system 
some  important  matter  has  been  overlooked  at  the  last  moment. 
In  such  cases  routine  must  be  sacrificed,  and  everything  done  to 
get  the  goods  into  the  plant  with  the  least  possible  delay — all 
routine  observances  being  completed  after  the  delivery. 

The  sources  from  which  purchase  requisitions  may  arise  are 
many.  As  regards  ordinary  standard  stores  and  materials  they 
will  originate  in  the  stores  department.  In  the  case  of  special 
material  required  for  a  customer's  order  they  should  be  originated 
by  the  first  person  who  is  in  a  position  to  discover  the  want.  In 
some  businesses  this  will  be  on  the  receipt  and  "dissection"  of 
a  customer's  order.  In  other  cases,  as  in  an  engineering  plant, 
the  making  up  of  a  "bill  of  material"  will  be  the  point  at  which 
the  fact  of  special  material  being  required  will  first  disclose  itself. 
In  the  case  of  urgent  repair  work,  they  may  originate  from  the 
foreman  in  charge  of  the  job.  They  may  also  come  from  the 
selling  depart  menl ,  calling  for  printed  matter,  special  advertizing, 
and  so  forth.  In  large  businesses  there  may  be  a  separate  official 
for  the  keeping  of  stationery,  and  office  supplies,  who  requisitions 
for  his  own  wants.  This  last  case  may  be  regarded,  however, 
as  a  storekeeping  transaction.  Requisitions  may  also  be  for  new 
equipment  and  may  be  originated  by  the  manager  or  works  engi- 
neer. In  this  case  it  may  happen  that  the  agent  is  directed  to 
obtain  some  specific  patented  article,  or  to  confine  his  inquiries 


rruciiAsi:  oiwehk 


139 


to  certain  specified  firms.     This  is  equivalent  to  making  a  special 
specification  to  cover  the  particular  case. 

In  a  very  large  plant  the  principal  difficulty  arising  from 
purchase  requisitions  is  that  of  overlapping,  or  duplicate  requi- 
sition. One  department  may  apply  for  material  which  exists 
already  in  plentiful  supply  in  another  portion  of  the  same  plant. 
With  a  proper  system  of  storekeeping  this  danger  is  eliminated, 
but  in  the  absence  of  such  a  system  it  is  a  failure  of  very  common 


Date 


PURCHASE  REQUISITION 

From 


Quantity- 
Article 


Date  Required 
Advise  Mr 


on  delivery 


Required  for_ 


.Bids  Invited     *  Date_ 


Purchase  Order  No._ 


issued  to 


Date. 


Originated  by 


Approved  by 


*  Spaces  provided  on  back  for  names  of  firms 

from  whom  bids  have  been  Invited 

FlG,  26. — Purchase  Requisition. 


occurrence.  The  proper  place  to  eliminate  this  defect  is  in  the 
storekeeping  department,  that  is  to  say  by  centralized  control  of 
all  stores. 

Purchase. — Requisition  blanks  (Fig.  2G)  are  very  simple,  being 
mainly  memoranda  stating  the  kind  and  number  of  the  article 
required.  But  as  there  is  a  difference  in  their  treatment,  as 
indicated  above,  it  will  be  well  to  have  them  of  three  colors: 
(1)  for  ordinary  requisitions  based  on  minimum  balance  of  stores 


140      MANUFACTURING  COSTS  AND  ACCOUNTS 

being  reached;  (2)  for  materials  of  a  special  nature  that  must  be 
delivered  by  a  definite,  but  future  date;  and  (3)  rush  requisitions, 
in  which  the  material  is  wanted  immediately,  and  all  routine 
must  be  put  on  one  side  to  obtain  its  instant  delivery. 

Purchase  requisitions  should  be  made  in  triplicate,  one  copy 
being  retained  by  the  originator,  and  two  being  forwarded  to  the 
agent.  When  the  agent  issues  a  purchase  order,  the  date,  number 
and  firm  are  endorsed  on  the  requisition,  and  one  copy  stamped 
and  returned  to  the  originator,  to  signify  to  him  that  the  goods 
are  on  order,  and  to  enable  him  to  make  inquiry  if  they  do  not 
come  in  to  time.  This  copy  should  be  filed  by  the  originator  in 
a  tickler,  according  to  date  of  delivery.  The  copy  retained  by 
the  purchase  agent  is  used  first  to  keep  a  memorandum  of  firms 
invited  to  bid,  and  when  a  bid  has  been  accepted,  to  record 
the  purchase  order  number,  date  and  name  of  firm.  It  is  then 
filed  under  the  name  of  the  originator. 

Obtaining  Bids  and  Issuing  Orders. — In  many,  perhaps  most 
cases,  it  will  not  be  necessary  for  the  purchase  agent  to  invite 
bids.  He  will  already  have  at  hand  all  the  data  necessary  for 
decision  as  to  whom  the  order  is  to  be  given.  Though  this  is 
not  a  matter  of  accounting,  it  may  be  desirable  to  indicate  the 
nature  of  the  mechanism  that  should  be  set  up  for  this  purpose. 
Purchasing  depends  for  its  success  primarily  on  knowledge  of  the 
market,  using  that  term  in  its  broadest  sense.  It  also  depends 
on  an  intimate  knowledge  of  the  storekeeping  organization  of  the 
plant,  and  a  comprehensive  grasp  of  the  whole  purchasing  situa- 
tion, particularly  as  to  the  way  in  which  orders  may  be  given  out 
so  as  to  obtain  the  maximum  benefit  from  the  volume  of  business 
done.  For,  though  there  is  no  sentiment  in  business,  yet  a  firm 
that  is  continually  changing  its  sources  of  supply,  loses  the  advan- 
tages which  accrue  when  a  supplier  regards  an  account  as  steady 
and  regular  and  worth  an  effort  to  keep.  In  purchasing,  it  is 
not  always  a  matter  of  price,  within  reasonable  limits,  that  should 
determine  the  destination  of  an  order.  Firms  that  have  a  repu- 
tation  for  keeping  promises  of  delivery,  who  exercise  care  in 
packing,  who  give  prompt  satisfaction  to  complaints,  and  in 
some  cases,  who  are  indulgent  as  to  credit,  may  be  more  satis- 
factory to  deal  with  in  the  long  run,  than  one  that  quotes  cut 
prices  accompanied  by  an  indifferent  service  in  other  respects. 
To  secure  the  full  advantage  of  trade  it  must  to  some  extent 
be  regular,   and  this  consideration  will  influence  the  degree  to 


PURCHASE  ORDERS  I  1 1 

which  the  practice  of  seeking  bids  on  every  possible  occasion  is 
exercised. 

In  some  businesses,  particularly  those  of  an  engineering  char- 
acter, the  variety  of  purchases  is  very  great.  It  is,  therefore, 
necessary  for  the  purchase  agent  to  classify  and  index  all  available 
information,  and  to  keep  good  records  of  bids  received,  so  that 
there  may  be  no  loss  of  time  in  searching  for  prices  and  descrip- 
tions when  an  order  is  to  be  given  out.  The  information  to  be 
indexed  thus  divides  itself  into  two  main  classes:  (1)  trade 
literature;  (2)  bids  and  correspondence  with  supplying  firms. 

The  indexing  and  classification  of  trade  literature  is  com- 
plicated by  the  manner  in  which  a  large  portion  of  it  is  issued. 
Notwithstanding  all  the  agitation  that  has  taken  place  at  different 
times  to  standardize  the  sizes  of  catalogues  and  booklets  very 
little  uniformity  has  as  yet  been  reached  in  this  respect.  The 
idea  that  a  trade  catalogue  must  possess  strong  individuality 
shows  great  persistence,  and  it  is  not  at  all  certain  that  it  is  not 
to  some  extent  justified.  But  from  the  viewpoint  of  the  indexer 
it  is  an  unqualified  nuisance,  especially  when  a  number  of  different 
lines  of  manufacture  are  included  in  one  more  or  less  portly  and 
handsomely  bound  volume. 

Where  the  space  can  be  provided,  it  is  probable  that  no  better 
arrangement  can  be  found  than  open  bookshelves,  for  the  carry- 
ing of  trade  catalogues.  Volumes  will  stand  upright,  and 
pamphlets  and  booklets  can  be  either  placed  on  filing  boxes 
(transfer  or  magazine  cases)  or  they  can  be  roughly  sorted  into 
sizes  and  made  into  a  volume  by  clips.  The  grouping  of  cata- 
logues must  depend  on  the  number  carried,  and  also  on  the  variety 
of  subjects  covered.  In  a  large  collection  covering  a  wide  range 
of  subjects,  shelves  may  be  apportioned  to  subjects;  thus  one  shelf 
may  be  devoted  to  "machine  tools"  or  "paints,  varnishes  and 
stains."  Catalogues  of  a  general  nature  may  either  be  cut  up 
and  rebound  in  sections,  if  they  are  of  sufficient  importance,  or 
shelves  may  be  set  apart  for  "general"  catalogues,  and  at  each 
individual  shelf  a  reference  card  may  be  placed  referring  the 
inquirer  to  the  "general"  shelf,  and  indicating  page  and  name  of 
catalogue  in  which,  for  example,  some  information  or  "machine 
tools"  or  "paints,  varnishes  and  stains"  may  be  found.  Of 
course  the  reference  would  be  specific,  thus: 

Gear-cutting  Machines.  See  General  Catalogues,  Smith  and  Granger, 
page  34. 


142      MANUFACTURING  COSTS  AND  ACCOUNTS 

Where  this  plan  can  be  adopted  it  is  to  be  preferred  to  more 
elaborate  arrangements.  The  only  catalogues  that  require  to 
be  indexed  are  the  "general"  ones.  Of  course  such  a  division 
would  not  be  of  much  use  to  a  stranger,  but  to  anyone  regularly 
working  with  the  catalogues,  and  who  makes  a  business  of 
carefully  looking  through  every  new  one  that  is  added  to  the 
library,  it  would  prove  serviceable. 

In  some  cases  a  catalogue  devoted  almost  entirely  to  one  class 
of  article  will  contain  a  few  pages  given  up  to  others  in  a  wholly 
different  class.  In  this  case,  the  catalogue  should  be  placed 
in  the  group  to  which  the  main  contents  refer,  and  the  other 
pages  taken  out  and  placed  in  the  magazine  case  of  the  shelves  to 
which  they  refer.  Or,  if  it  is  desired  not  to  mutilate  the  catalogue, 
then  a  plain  leaf  bearing  a  reference  as  above  mentioned  may  be 
placed  in  the  magazine  cases,  or  the  reference  card  at  the  shelf 
may  be  endorsed  to  show  the  locality  of  the  main  catalogue, 
thus: 

Aluminum  Paint.     See  Metals  and  Alloys  Catalogues,  Wilson,  page  23. 

A  little  care  and  ingenuity  will  make  this  method  of  handling 
trade  catalogues  quite  satisfactory.  The  main  precaution  to  be 
taken  is  the  indexing  of  articles  which  are  not  of  the  same  kind  as 
the  group  under  which  the  catalogue  is  kept.  As  each  catalogue 
is  received,  a  label  bearing  the  date,  and  stating  the  group  under 
which  it  is  to  be  kept,  should  be  placed  at  the  top  right-hand 
corner.  This  helps  to  ensure  that  it  will  be  replaced  on  the  right 
shelf  when  it  is  returned  after  use.  When  a  new  catalogue  is 
received  any  previous  catalogue  that  is  superseded  by  it  should 
be  withdrawn  from  the  shelves. 

Where  a  more  elaborate  method  is  desired,  card-indexing  may 
be  resorted  to.  Cards  will  be  kept  for  each  firm,  giving  location 
of  each  catalogue  (which  may  be  arranged  either  according  to 
alphabetical  order  of  firm  name,  or  numerically)  and  also  for 
specific  articles.  On  the  article  card,  the  name  of  each  firm 
making  or  supplying  that  article  with  reference  to  the  page  and 
catalogue  is  entered.  Each  card  thus  forms  a  list  of  all  the  firms 
to  whom  inquiries  or  invitations  to  bid  may  be  addressed  when 
the  article  is  being  purchased. 

The  second  division  of  information  required  by  the  purchasing 
agent  is  that  which  has  been  obtained  through  correspondence 
with   the  firms  themselves.     This,   being  perfectly  definite,  is 


PURCHASE  ORDERS  143 

easily  indexed.  A  card  will  be  kept  for  each  article,  and  the 
name  of  the  successful  firm  and  their  price  will  be  entered  when- 
ever a  bid  is  accepted.  A  corresponding  card  for  each  firm 
invited  to  bid  is  also  desirable,  and  a  useful  feature  will  be  the 
entry  of  each  bid  received  from  the  firm,  with  their  price  and  also 
the  successful  price.  By  this  means  the  general  position  of  a 
firm  on  competing  bids  is  registered,  and  firms  that  arc  habitually 
out  of  the  running  may  be,  in  time,  eliminated  from  the  list. 

Purchasing  agents  who  have  to  buy  staple  commodities 
subject  to  variation  of  the  market,  as  for  instance,  col  Ion,  or  pig 
iron,  must  of  course  possess  much  higher  qualifications  than 
those  who  merely  purchase  ordinary  supplies.  A  thorough 
knowledge  of  the  sources  of  production,  and  of  the  influences 
tending  to  alter  market  price,  must  be  combined  with  an  inti- 
mate knowledge  of  the  resources  of  the  plant,  its  prospects  of 
future  business,  the  general  state  of  credit  and  other  important 
questions,  so  that  long-term  contracts  can  be  entered  into  with 
safety  and  profit. 

The  use  of  a  special  blank  for  inviting  bids  saves  unnecessary 
typewriting  of  phrases  which  are  common  to  all  bids.  The 
information  given  on  this  blank  should  disclose  to  the  bidder  all 
the  data  by  which  it  is  expected  he  will  be  bound  in  the  event 
of  his  bid  being  accepted.  The  principal  items  are:  place  of 
delivery;  date  goods  are  required,  or  alternatively,  date  at  which 
bidder  promises  delivery;  stipulations  as  to  payment  of  freight; 
terms  of  account,  e.g.,  30  days  net.;  as  to  charge  for  packing  cases 
and  containers;  latest  date  at  which  bid  can  be  considered. 
Figure  27  provides  a  suggestion  for  an  Inquiry  Blank  of  this  kind. 
The  paper  used  should  be  sufficiently  thin  to  allow  of  several 
copies  being  manifolded  at  one  time. 

In  some  cases,  bids  will  be  invited  on  the  basis  of  samples, 
either  inclosed  with  the  inquiry,  or  open  to  the  inspection  of 
bidders  at  some  stated  place.  In  the  latter  case  the  place,  and 
the  hours  at  which  the  samples  may  be  inspected  should  be  men- 
tioned in  making  the  inquiry.  Sometimes  the  bid  will  be  in- 
vited on  the  basis  of  a  guarantee  of  some  kind,  and  the  terms  of 
this  should  be  very  fully  disclosed.  When  bids  are  invited  on 
specification,  the  inquiry  should  state  the  number  or  quantity  of 
the  articles,  and  the  conditions  of  delivery,  etc.,  and  a  copy  of  the 
specification  attached  to  the  inquiry. 

When  all  bids  are  in,  and  one  of  them  has  been  decided  on  as 


144      }f. 1  N  I '/•'.  1  ( ' TURING  COSTS  AND  ACCOUNTS 

acceptable,  it  will  promote  good  feeling  if  the  courtesy  of  an  advice 
of  rejection  is  extended  to  the  unsuccessful  bidders.  This  may 
take  the  form  of  a  printed  postcard,  bearing  the  words,  "We 

desire  to  thank  you  for  your  bid  on ,  and  to  inform  you 

that  the  order  has  now  been  placed."  A  notification  of  this 
kind  clears  up  uncertainty,  prevents  unnecessary  follow-up 
efforts,  and  saves  the  time  both  of  the  firms  bidding  and  also  of 
the  purchasing  agent  making  the  inquiry. 

Having  accepted  a  bid,  the  next  step  is  to  issue  a  purchase 


GENERAL   MANUFACTURING    CO. 
WORKVILLE.  N.Y. 


19 


INQUIRY 


JTq_ 


Please   Quote  your   Price  on  the   following 


General    Mfg.  Co. 


Conditions 


Delivery   Fob. 


Terms        30  Days   Net 
Cases  or   Containers   to  be  Credited  on  Return 
Delivery  Required   by 


-This   Inquiry  will   be   Closed   on 


Fig.  27. — Blank  for  inviting  bids. 

order  for  the  goods  to  be  delivered.  The  purchase  order  should 
repeat  the  conditions  as  to  delivery,  terms,  etc.,  stated  on  the 
inquiry,  and  in  addition  specify  the  distinguishing  marks  or 
stencils  to  appear  on  packages.  The  purchase  order,  therefore, 
will  be  a  blank  very  similar  to  Fig.  28.  The  portion  below  the 
signature  does  not  appear  on  the  copy  sent  to  the  supply  firm. 

As  it  is  desirable  that  the  receiving  department  shall  be 
advised  of  approaching  deliveries,  and  also  be  able  to  identify 
them  when  they  come  in,  it  is  advisable  to  manifold  the  purchase 
order  (omitting  any  price  figures  that  may  appear  on  it)  and  for- 


PURCHASE  ORDERS 


L45 


ward  the  copy  to  the  receiving  clerk.  He  will  file  it  in  a  tickler 
a  day  or  so  ahead  of  expected  delivery,  and  will  thus  be  in  a 
position  to  identify  the  consignment  on  arrival. 

There  are,  of  course,  other  classes  of  purchases  than  those  of 
goods.  Services  of  all  kinds  payable  in  salaries  and  wages,  and 
such  items  as  insurance,  rent,  taxes  and  so  forth,  are  just  as 
much  purchases  as  are  pig  iron,  machinery,  or  oil  and  waste. 
But  it  would  be  unnecessary  to  discuss  the  routine  pertaining  to 
such  transactions,  except  indeed  as  to  the  conditions  under  which 


GENERAL  MANUFACTURING  CO 
WOKKVIXLE.  N.Y. 

PURCHASE  ORDER  NO. 


To 


Deliver    the  goods  mentioned  below   not 
later  than F.O.B. 


Mark  Packages- 
Price 


JTerms 


The  above  Order  No.  to  Appear  on  Your  Invoice 
Signature 


Order  Acknowleged . 
Promised  for 


Delivery  Urged 
Goods  Delivered 
Invoice  Passed  _ 


Account 
Chargeble 


Fig.  28. — Purchase  Order. 

labor  is  employed,  which  will  be  dealt  with  in  a  later  chapter. 
The  outline  of  purchasing  routine  just  given  belongs  rather  to 
the  subject  of  organization  than  that  of  accounting  proper,  for 
as  will  be  noticed,  no  question  of  accounts  has  yet  arisen.  The 
routine  of  purchasing  is,  in  fact,  much  the  same  for  a  manufac- 
turing business  as  for  any  other,  and  has  only  been  enlarged  on 
here  since  it  sets  in  motion  all  subsequent  activities,  and  is  there- 
fore an  appropriate  introduction  to  the  subject  of  manufacturing 
accounts. 


ro 


CHAPTER  III 
RECORDING  PURCHASE  EXPENDITURES 

Having  briefly  discussed  in  the  previous  chapter  the  principal 
precautions  to  be  taken  in  making  purchases,  we  now  enter  on  the 
subject  matter  of  manufacturing  accounts,  inasmuch  as  for 
everything  purchased,  that  is,  for  every  expenditure,  there  must 
be  documentary  evidence  of  some  kind,  and  this  forms  the  start- 
ing point  of  a  series  of  entries  to  be  made  in  the  accounts  of  the 
business. 

Everything  purchased  has  to  be  paid  for  eventually,  but  not 
necessarily  at  the  moment  of  purchase.  That  is  to  say,  purchases 
may  be  of  two  kinds,  as  regards  terms  of  payment:  (1)  the  pur- 
chase may  be  for  cash;  (2)  the  purchase  may  be  on  credit.  There 
is  also  a  third  class  of  transaction,  when  purchases  are  paid  for  at 
once,  not  in  cash,  but  by  a  credit  instrument,  called  a  note  or  bill. 
This  is,  in  fact,  a  deferred  cash  payment,  but  as  the  handling  of 
bills  or  notes  is  a  part  of  general  accounting,  and  is  a  subject 
by  itself  it  will  not  be  discussed  here. 

Each  of  these  two  classes  of  transactions  is  recorded  in  different 
journals.  Cash  purchases  are  recorded  in  the  Cash  Journal, 
purchases  on  credit  in  the  Purchases  Journal.  A  variant  of  the 
latter,  widely  used  in  the  United  States,  is  known  as  the  Voucher 
Record,  which  is  intended  to  avoid  the  necessity  of  further  posting 
of  the  transactions  to  a  purchases  ledger.  This  will  be  dealt 
with  later. 

The  object  of  each  of  these  two  journals,  in  fact  of  all  journals, 
is  very  similar.  They  serve  to  make  a  list  of  the  transactions 
in  sufficient  detail  for  their  subsequent  identification,  with  the 
money  value  of  each  transaction  appended,  so  that  at  the  end  of 
a  financial  period,  say  a  month,  we  have  a  complete  list  of  a 
particular  class  of  transactions.  This  information  having  been 
accumulated  in  as  much  detail  as  is  necessary  for  the  given  pur- 
pose, we  are  enabled  to  charge  each  of  the  transactions  to  one  set 
of  accounts  and  credit  it  to  another  set  of  accounts,  or  in  the 
simplest  case,  we  may  merely  make  a  total  of  the  entire  set  of 

146 


RECORDING  PURCHASE  EXPENDITURES        147 


transactions  and  charge  this  total  to  one 
account  and  credit  it  to  another.  In 
general,  however,  several  accounts  are 
involved,  and  in  order  to  handle  these 
transactions  conveniently,  it  is  usual  to 
make  a  number  of  separate  columns  in 
the  journal,  each  column  representing 
some  account  in  regard  to  which  the 
transactions  are  expected  to  be  fairly 
numerous.  By  writing  the  amounts  in 
the  proper  columns,  we  are  enabled  at 
the  end  of  the  period  to  add  up  these 
columns,  find  the  totals,  and  charge  or 
credit  these  totals  to  the  accounts  ef- 
fected, thus  avoiding  the  trouble  of  post- 
ing every  separate  transaction,  item  by 
item.  In  the  Cash  and  the  Purchases 
Journals,  now  in  question,  we  have  ex- 
cellent illustrations  of  this  mechanism 
of  journalizing.  In  the  case  of  the  Pur- 
chase Journal  every  item  has  to  be 
credited  to  the  personal  account  of  a 
creditor,  and  the  total  of  these  transac- 
tions at  the  end  of  the  period  is  also 
posted  to  the  credit  of  a  Creditor's 
Control  account.  With  regard  to  the 
charges  to  be  made  from  this  journal, 
these  fall  under  a  number  of  heads  and 
though  the  heads  themselves  may  vary 
in  different  businesses  and  require  more 
subdivision  in  some  than  in  others,  some 
such  division  as  shown  in  Fig.  2Q  will  in 
general  be  necessary. 

The  first  three  columns  of  the  Purchase 
Journal,  as  shown  in  Fig.  29,  are  devoted 
to  the  written  description  of  the  item, 
that  is  to  say,  to  the  date  of  the  transac- 
tion, the  firm  from  whom  the  goods  or 
services  were  purchased,  a  brief  descrip- 
tion of  the  items,  sufficient  for  identi- 
fication, and  the  price  paid  or  invoice 


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148      MANUFACTURING  COSTS  AND  ACCOUNTS 

value  of  the  transaction.  The  remaining  columns  serve  for  the 
allocation  of  charges.  In  the  particular  ruling  shown,  we  have 
in  the  first  column,  an  opportunity  to  segregate  all  those  charges 
which  pertain  to  the  selling  department.  In  the  second  column 
are  sundry  items  chargeable  to  the  factory  but  not  assignable  to 
a  particular  department  at  the  moment.  In  the  next  three 
columns,  we  have  accommodation  for  expense  charges  against 
departments  1,  2,  and  3,  respectively.  The  stores  allocation 
column  is  a  very  important  one.  In  this  column  are  charged  all 
stores  and  materials  purchased  whatever  their  subsequent  des- 
tination may  be.  In  the  next  column  items  like  rent,  taxes  and 
insurance  are  charged,  then  a  column  is  devoted  to  purchases 
of  plant,  new  equipment,  and  such  like  additions  to  value. 
Finally  we  have  a  sundry  accounts  column,  space  being  provided 
for  the  name  of  the  account  to  be  charged  and  for  the  amount. 
This  column  is  used  for  charges  to  accounts  which  do  not  occur 
frequently.  In  fact,  the  whole  idea  of  providing  columns  is  to 
take  up  transactions  which  do  occur  frequently.  They  are  simply 
for  the  purpose  of  saving  time  in  posting.  There  is  no  advantage 
in  a  large  number  of  columns,  but  a  positive  disadvantage  on 
account  of  the  unwieldy  size  of  the  book,  and  such  columns  should 
be  therefore  confined  to  classes  of  transactions  which  do  occur 
with  reasonable  frequency.  As  these  will  vary  in  business  to  busi- 
ness it  is  obviously  impossible  to  give  more  than  a  general  idea 
of  the  classifications  usually  to  be  met  with  in  manufacturing. 
Thus,  for  example,  in  some  businesses  it  might  be  necessary  or 
desirable  to  split  up  the  stores  column  into  several  columns.  It 
might  be  thought  advisable  to  have  separate  columns  for  fuel,  for 
pig  iron,  for  brass  or  for  any  other  special  product  which  was 
purchased  frequently  and  required  to  be  recorded  separately 
from  the  general  total  of  stores  and  material  purchased.  In 
the  same  way  the  selling  expense  column  might  be  subdivided 
into  traveling  expenses,  advertizing,  etc.,  according  to  the 
necessities  of  the  business.  Under  the  head  of  general  expense 
we  might  have  subdivisions  such,  for  example,  as  a  special  column 
for  postages  and  telegrams,  but  all  these  matters  do  not  involve 
any  principle,  but  are  rather  dictated  by  convenience.  It  is  not 
necessary  for  us,  therefore,  to  do  more  than  generally  note  their 
possibilities. 

At  the  end  of  the  financial  period,  say  monthly,  all  these  columns 
are  totalled.     The  total  of  the  first  or  invoice  column  is  carried 


RECORDING  PURCHASE  EXPENDITURES        149 


to  the  credit  of  a  Creditor's  Ledger 
(Accounts  Payable)  Control  account. 
It  will  also  be  understood  that  each 
item  is  posted  separately  to  the  credit 
of  the  personal  account  of  a  creditor, 
and  the  total  of  such  individual 
credits  will,  of  course,  equal  the  total 
of  the  column  which  has  been  carried 
to  the  Control  account.  With  regard 
to  the  allocation  columns,  all  of  these 
except  the  last  one  on  the  right-hand 
side  will  be  totalled  and  these  totals 
carried  to  the  debit  of  the  various  ac- 
counts affected.  In  the  case  of  the 
column  on  the  right-hand  side  headed 
"Sundry  Accounts,"  a  recapitulation 
must  be  made  of  the  different  items, 
that  is  to  say,  all  those  chargeable  to 
one  account  must  be  collected  to- 
gether and  the  total  charged  to  the 
account  in  question,  then  the  same 
process  is  followed  with  the  other 
items.  In  other  words  the  total  at 
the  foot  of  the  sundries  column  has  to 
be  split  up  into  several  subtotals  each 
of  which  is  charged  to  its  proper 
account. 

At  the  end  of  the  month  when  all 
entries  in  the  book  are  completed,  and 
all  columns  have  been  totalled,  a 
check  on  the  accuracy  of  the  work  is 
obtained  by  observing  that  the  totals 
of  all  the  allocation  columns,  includ- 
ing that  of  the  right-hand  column 
for  sundry  accounts,  is  equal  to  the 
total  in  the  invoice  column.  This 
shows  that  all  our  charges  are  equal  to 
all  our  credits  and  the  book  is,  there- 
fore, self-balancing  in  this  respect. 

A  variant  of  the  Purchases  Journal 
is  frequently   made   use  of.     This  is 


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150      MANUFACTURING  COSTS  AND  ACCOUNTS 

called  the  Voucher  Register  and  is  shown  in  Fig.  30.  Its  rul- 
ing is  practically  identical  with  that  of  the  Purchases  Journal, 
with  the  exception  that  no  provision  is  made  for  posting  individ- 
ual items  to  creditors'  accounts.  The  theory  of  this  book  is 
that  all  transactions  are  settled  in  cash  closely  following  on  the 
purchase.  A  serial  number  is  given  to  the  vouchers  or  invoices 
received  and  columns  are  provided,  not  only  for  the  date  of  in- 
voice, but  also  for  the  date  of  payment  by  the  firm.  Inspection 
of  the  register  thus  discloses  at  any  time  the  invoices  remaining 
unpaid.  In  order  to  obtain  a  check  on  this  amount  it  is  advisable 
to  set  up  an  account  corresponding  to  the  Creditor's  Control 
account  and  which  may  be  termed  Accounts  Payable.  This 
should  be  credited  with  the  total  of  all  invoices  in  the  sixth 
column  headed,  "Amount,"  and  as  invoices  are  paid  through  the 
Cash  Journal,  this  account  should  be  charged  with  the  amount 
of  the  payment.  The  balance  in  the  account  at  the  end  of  the 
month  should  correspond  to  the  total  of  all  the  unpaid  items  in 
the  Voucher  Register.  Though  the  Voucher  Register  is  an  ex- 
cellent labor-saving  device,  where  accounts  are  paid  promptly,  it 
is  a  source  of  much  confusion  if  credit  is  taken  on  a  considerable 
scale.  Unless,  therefore,  accounts  can  be  settled  promptly  on 
receipt,  it  will  save  much  confusion  to  employ  a  regular  Purchases 
Journal  with  individual  accounts  for  each  creditor.  Unques- 
tionably in  any  large  business  the  financial  arrangements  should 
be  such  that  accounts  are  settled  promptly.  One  of  the  claims 
made  for  the  Voucher  Register  is  that  it  forces  the  necessity  of 
such  prompt  payment  and  thereby  secures  discounts  on  purchases 
which  would  otherwise  be  lost. 

We  have  now  to  consider  transactions  in  which  cash  is  paid 
immediately  and  we  have  also  to  consider  receipts  of  cash.  Both 
these  transactions  are  dealt  with  in  what  is  called  a  Cash  Journal. 
The  left-hand  side  of  such  a  journal,  shown  in  Fig.  31,  deals  with 
receipts,  and  the  right-hand  side  with  payments.  As  the  princi- 
pal source  of  receipts  is  from  sales,  the  allocation  columns  by 
which  credits  are  given  to  the  persons  from  whom  cash  is  received, 
are  divided  into  two  sets,  one  dealing  with  sold  ledger  accounts  and 
the  other  dealing  with  sundry  accounts.  The  date,  the  source, 
and  the  item,  with  the  amount,  are  first  entered  and  then  the 
amount  is  also  set  out  in  one  of  these  two  allocation  columns. 
If  it  is  a  check  received  from  a  customer  it  is  entered  in  the  sold 
ledger   accounts   column   which    is   threefold:  First,  we  have  a 


RECORDING  PURCHASE  EXPENDITURES       151 


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152      MANUFACTURING  COSTS  AND  ACCOUNTS 

column  for  the  folio  number  of  the  individual  customer;  secondly, 
we  have  a  column  for  the  amount  of  the  check;  thirdly,  we  have  a 
column  for  the  discount  taken  by  the  customer — the  total  of 
these  last  two  columns  being,  of  course,  equal  to  the  amount  of 
his  indebtedness  to  us.  All  other  receipts  are  entered  in  the 
sundry  receipts  column,  which  contains  space  for  entering  the 
name  of  the  account,  the  folio,  and  the  amount.  At  the  end 
of  the  month  all  these  columns  are  totalled.  The  total  of  the 
column  headed,  "Amount  Received,"  is  charged  to  Cash  ac- 
count. The  totals  in  the  two  columns  under  the  head  of  sold 
ledger  accounts  are  charged  to  a  Sold  Ledger  Control  account. 
The  individual  items  in  the  sundries  column  are  collected 
together  in  the  same  way  as  described  for  the  sundries  column  in 
the  Purchases  Journal  and  posted  to  the  credit  of  the  accounts 
concerned.  In  addition  to  this,  each  separate  item  appearing 
under  the  head  of  sold  ledger  accounts  is  credited  to  the  individual 
account  of  the  customer,  these  individual  credits  being,  of  course, 
equal  in  amount  to  the  total  credited  to  the  Control  account. 
The  totals  of  the  two  allocation  columns  (omitting  discounts) 
should,  of  course,  balance  the  total  in  amount  received  column, 
thus  establishing  a  proof  of  the  correctness  of  the  transactions. 
The  total  in  the  discount  column  is  credited  to  a  Discounts 
Allowed  account. 

The  right-hand  side  of  the  Cash  Journal  deals  with  cash  pay- 
ments. Spaces  are  provided  for  the  date,  check  number,  the 
person  to  whom  paid,  nature  of  the  item,  and  the  amount. 
The  rest  of  the  page  is  devoted  to  the  allocations.  The  first 
principal  group  of  payments  will  undoubtedly  be  those  for  goods 
purchased.  We  have,  therefore,  a  triple  column  headed  "Bought 
Ledger,"  giving  a  space  for  the  folio,  the  amount,  and  discount 
taken.  Next  we  have  a  column  headed  "Selling  Expense," 
followed  by  one  for  "Works  Expense."  Separate  columns  are 
also  provided  for  salaries  and  wages,  one  for  rents,  insurance  and 
taxes.  In  some  cases  it  is  advisable  to  have  a  column  for  stores, 
wherein  small  cash  purchases  may  be  directly  charged  to  Store 
account.  Finally,  as  usual,  we  have  a  sundries  column.  These 
may  be  regarded  as  usual  allocations  in  a  manufacturing  business, 
but,  of  course,  will  be  varied  according  to  individual  necessities. 
We  may  now  take  a  general  view  of  what  is  intended  to  be 
effected  by  the  Purchases  Journal  and  the  Cash  Journal.  The 
latter  is,  of  course,  really  two  journals,  one  dealing  with  cash 


RECORDING  PURCHASE  EXPENDITURES        L53 

receipts,  and  one  with  cash  payments.     It  is  only  for  convenience 
that  they  are  combined  in  one  book  and  it  will  be  obvious  that 
the  two  classes  of  transactions  have  very  little  to  do  with  one 
another.     Generally,  however,  provision  is  made  for  ascertain- 
ing the  cash  balance  at  the  foot  of  each  page,  so  that  it  may  be 
made  known  in  a  moment  without  delay,   but  for  all   other 
purposes  the  two  halves  of  this  journal  may  be  considered  as 
separate  books.     We  need  only,  at  the  present  moment,  to  con- 
sider that  side  of  the  Cash  Journal  which  relates  to  payments. 
The  general  purpose,  then,  of  the  Purchases  Journal  and  the 
Cash  Payments  Journal  is,  in  the  first  place,  to  acknowledge  the 
source  of  the  purchase  and  to  credit  either  cash  or  some  individ- 
ual supplier,  and  on  the  other  hand  to  charge  the  items  thus 
acquired  to  one  of  several  different  accounts  corresponding  to 
the  natural  divisions  of  the  business.     At  the  beginning  of  the 
month  we  shall  have  had  a  supply  of  cash  in  hand,  and  at  the 
end  of  the  month  part  of  this  cash  will  have  been  transmuted 
into  other  things  represented  by  the  allocations  in  the  Cash 
Payments  Journal,  and  we  shall  also  have  received  credit  from 
various  supplying  firms,  and  the  credit  so  received  will  have 
been  transmuted  into  other  things  as  shown  by  the  allocations 
in  the  Purchases  Journal.     It  will  appear  then  that  our  cash  has 
decreased,  and  our  credit,  that  is  to  say  our  liability,  increased. 
We  may  regard  this  matter  as  virtually  a  decrease  in  cash, 
because  later  on  it  will  have  to  be  met  by  a  payment  of  cash. 
For  theoretical  purposes,  therefore,  we  may  say  that  cash  has 
been  transmuted  into  a  number  of  other  things,  services  and 
goods,  and  we  will  now  proceed  to  trace  these  various  allocations 
into  their  ledger  accounts.     On  reference  to  the  general  diagram, 
a  double  column  of  ledger  accounts  will  be  seen  near  the  left- 
hand    side.     For    the    most  part  these  represent  the  different 
expenditures  which  have  been  made  at  the  expense  of  cash. 
Thus,  we  have  to  begin  with,  "Stores  Account,"  which  as  we 
have  seen,  may  receive  a  charge,  either  from  Cash  Journal  or 
Purchases    Journal.     Next,    we    have   "Plant  Account"  which 
may  receive  an  occasional  charge  through  Purchases  Journal. 
The  third  account  is  headed  "Patterns,  Jigs,  Etc."     This  is 
rarely  charged  from  outside  sources,  except  in  the  rare  case  of  a 
pattern  or  jig  having  been  purchased  from  outside.     The  next 
two    accounts,    "Depreciation,"    and    "Interest,"    are   nominal 
accounts  and  do  not  represent  anything  in  the  nature  of  pur- 


154       MANUFACTURING  COSTS  AND  ACCOUNTS 

chase;  we  may,  therefore,  leave  their  consideration  to  a  later 
period.  "Rents  Account"  may  also  be  charged  either  from 
Cash  Journal  or  Purchases  Journal.  This  account  is  merely 
typical  of  a  number  of  separate  accounts  which  would  in  the 
ordinary  course  be  set  up  for  such  items  as  rent,  different  kinds 
of  insurance,  taxes,  etc.  In  order  to  avoid  unnecessary  com- 
plications, one  account  has  been  made  as  representative  of  the 
entire1  class. 

Now  all  these  ledger  accounts  have  in  the  diagram  been 
placed  in  one  group  by  themselves  because  there  is  a  certain 
peculiarity  about  them.  The  charges  made  to  them  month  by 
month,  are  not  necessarily,  or  even  usually,  expended  on  manu- 
facture during  that  same  month.  This  means  that  each  of  these 
accounts  will  have  a  balance  in  it  at  the  end  of  the  month, 
representing  the  difference  between  what  has  been  put  in  through 
Cash  and  Purchases  Journals,  and  what  has  been  taken  out  for 
purposes  of  manufacturing. 

All  ledger  accounts  in  the  right-hand  group,  on  the  other  hand 
(except  Interest) ,  deal  with  items  of  such  a  nature  that  they  are 
passed  at  once  into  manufacturing  month  by  month,  and,  there- 
fore, do  not  have  any  balance  remaining  in  them.  The  Works 
Wages  account,  and  the  Works  Salaries  account  are  charged 
from  the  Cash  Journal.  The  Works  Expense  account  may  be 
charged  from  either  of  the  journals.  Spoilage  account,  on  the 
other  hand,  is  not  chargeable,  usually,  from  either  of  these 
journals,  but  from  another  source  about  which  we  shall  speak 
later.  In  addition  to  the  ledger  accounts  shown  in  this  double 
column,  there  are  also  other  accounts  which  are  charged  to 
Selling  Expense.  The  total  effect  of  these  transactions  is  that 
we  have  diminished  our  Cash  account,  or  have  incurred  liability 
which  will  ultimately  lead  to  the  diminishing  of  that  account,  and 
we  have  piled  up  values  received  in  one  or  other  of  a  number  of 
accounts  which  are  named  according  to  the  class  of  purchase 
we  have  made.  So  far  we  have  not  dealt  with  any  manufacturing 
operations  and  have  merely  paved  the  way  by  preliminary 
classifications  of  purchases  in  ledger  accounts  which  classifica- 
tions represent  the  subsequent  uses  of  the  articles  purchased. 
A  fresh  set  of  transactions  which  will  lead  to  the  withdrawal  of 
values  from  all  these  accounts  and  their  combination  in  new 
form,  either  in  the  interests  of  selling  or  of  manufacturing, 
has  now  to  be  considered. 


RECORDING  PURCHASE  EXPENDITURES 

Reference  has  been  mentioned  more  than  once  to  the  fact  that 
the  accounts  shown  here  are  merely  intended  to  be  typical. 
They  will  in  most  cases  require  amplification  and  more  par- 
ticularly will  require  subdivision,  as  for  example,  in  the  case  of 
Rents  account,  already  just  mentioned.  Plant  account  also  is 
normally  subdivided  into  a  number  of  differenl  plant  and  equip- 
ment accounts.  For  example,  buildings,  machinery,  tools, 
power  plant,  transportation  appliances,  office  equipment,  etc., 
will  all  have  separate  ledger  accounts.  But  this  is  merely  a 
matter  of  convenience,  and  not  a  difference  in  principle.  Our 
purpose  will  be  served  if  we  consider  the  Plant  account  as  typical 
of  a  class  of  accounts.  It  may  be  subdivided  to  any  extent  that 
is  found  necessary  for  any  particular  business.  On  the  other 
hand,  there  is  no  manufacturing  business  in  which  the  Plant 
account  will  be  wholly  absent  and  the  same  remark  applies  to 
all  the  other  accounts  presented  here.  When  the  Cash  and 
Purchases  Journals  have  been  balanced  up  and  all  the  postings 
made,  the  first  stage  in  manufacturing  accounting  has  been 
completed.  This  is  by  far  the  simplest  stage,  and  except  in 
as  far  as  the  title  of  the  accounts  themselves  are  peculiar  to 
manufacturing,  there  is  nothing  special  about  this  part  of  the 
accounting  scheme  that  is  not  common  to  all  businesses  which 
begin  by  purchasing.  Special  peculiarities  of  manufacturing 
accounting  will  be  found,  on  the  other  hand,  to  commence 
with  the  employment  of  the  values  which  have  been  heaped  up 
in  the  ledger  accounts  just  discussed. 

In  the  ensuing  chapters  the  groups  of  ledger  accounts  con- 
cerned with  manufacturing  operations  will  be  considered.  Those 
which  are  concerned  with  selling  expense  are  outside  the  scope 
of  cost  accounting  and  have  been  briefly  dealt,  with  in  Part  I 
in  such  a  way  as  to  show  their  relation  to  the  general  scheme  of 
accounts. 


CHAPTER  IV 

PURCHASES  NOT  IMMEDIATELY  CHARGEABLE- 
STORES 

It  has  been  pointed  out  that  while  some  purchases  are  charge- 
able immediately  to  production,  as  for  example,  the  purchase  of 
labor  in  all  its  forms,  others  on  the  contrary  are  not  so  chargeable. 
This  may  arise  either  from  the  transaction  being  a  purchase  in 
bulk,  for  storage,  of  articles  that  will  gradually  be  used  and 
charged  only  at  the  time  of  using,  or  it  may  arise  from  the  nature 
of  the  thing  purchased,  as  for  example,  a  new  building,  or  a  large 
and  powerful  machine.  It  will  be  quite  evident  that  a  purchase 
of  10  tons  of  copper,  when  the  average  monthly  consumption  is 
only  1  ton,  cannot  be  properly  charged  against  the  current  month's 
production  when  it  happens  to  be  received,  and  still  less  can  the 
purchase  of  a  machine  which  will  probably  last  for  15  or  20 
years,  be  charged  either  against  the  current  month  or  even  the 
current  year  in  which  the  purchase  happens  to  be  made. 

In  all  cases  where  purchases  are  not  immediately  chargeable 
to  production,  it  is  necessary  to  set  up  mechanism  for  charging 
out  a  proper  amount  in  each  current  period,  and  also  for  ascer- 
taining the  balance  left  on  hand  at  the  end  of  each  such  period. 
This  balance  is,  of  course,  an  asset,  and  the  amount  of  it  must 
appear  in  the  Balance  Sheet  if  correct  accounting  is  to  be  realized. 

I.  STORES 

The  first  group  of  purchases  which  we  shall  consider  under  this 
head  of  "purchases  not  immediately  chargeable"  is  that  com- 
monly called  "stores."  This  is  a  somewhat  indefinite  term, 
being  sometimes  confined  to  mere  supplies  such  as  oil  or  waste, 
and  sometimes  extended  to  all  consumable  articles  which,  at 
some  time  or  other  will  be  charged  to  the  shops,  either  for  direct 
manufacture  or  for  service  purposes.  It  is  used  in  this  work  in 
the  latter  souse.  The  dividing  line  between  stores  and  certain 
classes  of  tools  and  equipment  is  rather  fine.     A  file  is  usually 

156 


PURCHASES  NOT  IMMEDIATELY  CHARGE  ABU.      L57 

considered  as  stores,  and  so  are  the  blades  of  a  hack  saw.  But 
the  hack  saw  itself,  even  though  its  total  cost  may  be  far  below 
the  value  of  some  single  transactions  in  stoics,  is  considered  as 
equipment.  The  division  is,  however,  quite  clear  in  practice. 
Stores  are  charged  when  used.  They  are  not  subject  to  depre- 
ciation, and  are  not  charged  out  by  means  of  a  depreciation  rate. 
Items  of  equipment  are  never  charged  out  as  a  whole,  but  always 
by  means  of  a  depreciation  rate.  The  significance  of  this  dis- 
tinction will  be  understood  later,  when  the  meaning  of  deprecia- 
tion has  been  explained. 

Storekeeping  is  a  complex  process,  since  it  involves  not  only  a 
very  large  number  of  transactions,  but  each  of  these  transact  ions 
is  in  itself  manifold,  and  though  not  all  of  them  become  the 
subject  of  accounting,  most  of  them  must  collectively  or  indi- 
vidually be  reflected  in  the  accounts.  For  the  most  part  stores 
are  purchased  in  bulk,  and  their  receipt  must  be  accompanied 
with  a  scrutiny  to  determine  whether  the  delivery  is  strictly  in 
conformity  with  the  terms  of  the  order,  and  in  some  cases  with 
specification.  The  price  has  to  be  verified,  the  quantity  vouched 
for,  the  cost  of  freight  ascertained  and  combined  with  the  price 
for  accounting  purposes,  and  then  the  stores  themselves  have  to 
be  allotted  a  definite  space,  a  definite  reference  number  or  symbol, 
and  a  stores  item  ledger  card  appropriated  to  that  particular 
class  of  goods.  All  these  transactions  have  reference  only  to  the 
receipt  of  stores.  Their  distribution  to  the  shops  and  the  ques- 
tion of  balances  on  hand  form  entirely  new  series  of  transactions. 

In  order  to  issue  stores  to  the  shops,  the  storekeeper  requires 
written  authority,  which  not  only  is  his  voucher  for  parting  with 
the  goods,  but  furnishes  the  necessary  data  for  the  proper  charg- 
ing of  the  item  to  the  purpose  (represented  by  an  "order") 
for  which  it  has  been  consumed.  The  quantity  involved  is,  of 
course,  also  recorded,  and  then  the  item  has  to  be  priced  out  so 
that  the  proper  amount  ma}"  be  credited  to  Stores  account  and 
charged  to  the  right  division  of  production.  It  will  be  obvious 
that  in  the  majority  of  cases  stores  issue  transactions  will  be 
much  more  numerous,  though  for  smaller  amounts,  than  stores 
receipts. 

Each  different  kind  of  stores,  and  in  a  large  plant  these  will 
sometimes  run  into  many  thousands,  usually  requires  a  separate 
accounting  both  as  to  receipt  and  issue.  A  ledger  card  is  there- 
fore appropriated  to  each  such  kind  or  article,  and  the  first  entry 


158      MANUFACTURING  COSTS  AND  ACCOUNTS 

on  it,  as  mentioned  above,  is  that  recording  the  receipt  in  bulk, 
and  in  some  cases  the  cost  of  freight  is  also  included.  Later 
entries  will  record  the  different  quantities  issued  to  the  shops,  and 
also  the  order  numbers  to  which  they  have  been  issued.  At  the 
close  of  each  day,  or  week,  or  month,  as  may  be  desired,  a  balance 
may  be  struck  on  each  of  these  ledger  cards,  and  the  balance 
shown,  as  regards  quantity,  should  correspond  with  the  actual 
quantity  of  that  item  actually  and  physically  in  the  storehouse. 
In  modern  plants,  a  number  of  such  comparisons  between  the 
quantity  as  shown  by  the  ledger  card  and  the  quantity  as  ascer- 
tained by  count  or  weighing  are  carried  out  every  day.  This  is 
termed  a  "perpetual  inventory."  The  term  is  not  a  good  one. 
"Continuous  inventory"  would  more  nearly  describe  both  the 
purpose  and  method  of  the  work. 

The  principal  ledger  account  concerned  with  stores  is  that 
shown  on  the  general  diagram  as  "Stores  account."  This, 
however,  is  merely  intended  as  representative  of  a  group  of  ac- 
counts, which  though  all  Stores  accounts,  are  for  convenience 
allotted  to  particular  classes  of  stores  in  some  cases.  Thus,  for 
example,  we  may  have  several  special  accounts  for  brass,  copper, 
pig  iron,  sulphuric  acid,  dyes,  cotton,  or  whatever  goods  are 
bought  with  sufficient  frequency  or  in  sufficient  quantity  to  make 
it  worth  while  to  provide  a  special  ledger  account  for  them  and 
one  general  Stores  account  for  all  other  kinds  of  stores.  On  the 
other  hand,  there  is  no  absolute  necessity  for  such  subdivision 
of  the  Stores  account.  It  is  simply  a  matter  of  convenience, 
and  where  such  subdivisions  are  not  in  use  then  a  general  ac- 
count to  be  entitled  Stores  account  or  more  properly  Stores 
Control  account  will  serve  every  purpose  of  the  most  rigid 
accounting. 

When  a  Stores  Control  account  is  used,  then  it  generally  be- 
comes desirable  to  have  a  number  of  strictly  subsidiary  accounts 
in  which  detail  can  be  grouped  as  and  when  required,  and  this 
subdivision  can  be  carried  to  any  desired  extent,  until  we  have, 
as  in  some  engineering  businesses,  thousands  of  such  subsidiary 
Stores  accounts.  In  the  present  work  such  accounts  will  be 
termed  Stores  Item  accounts  to  indicate  that  they  are  subsidiary 
in  character  and  merely  represent  the  itemized  detail  of  the 
transactions  reflected  in  the  Stores  Control  account. 

If  we  have  100  transactions,  say,  for  example,  purchases  of  100 
different  kinds  of  stores,  and  if  we  list  these  in  a  Purchase  Journal, 


PURCHASES  NOT  IMMEDIATELY  CHARGE.  1  BLE     159 

then,  as  shown  in  the  previous  chapter,  it  is  a  simple  matter  to  :i<l<  I 
all  these  amounts  together,  and  charge  them  in  one  sum  to  a 
Stores  account.  Similarly  if  we  have  a  list  of  another  100  trans- 
actions representing  issues  of  stores  to  the  shops,  and  li^f  these 
in  a  suitable  journal,  then  it  is  an  equally  simple  matter  to  add 
all  the  amounts  together  and  credit  them  in  one  sum  to  Stores 
account.  Now  when  this  has  been  done,  if  we  take  out  the  bal- 
ance in  Stores  account,  it  obviously  should  agree  with  the  actual 
balance  of  stores  physically  remaining  in  the  storehouse.  For 
many  accounting  purposes  this  is  all  that  is  necessary,  provided 
that  a  "stock-taking"  or  inventory  is  made  at  regular  periods  to 
ensure  that  agreement  between  what  should  be  in  stores  as  shown 
by  the  account,  and  what  actually  is  there  as  ascertained  by  count 
or  weighing  really  does  exist. 

But  under  such  an  arrangement,  if  we  find  at  the  end  of  a 
period  that  our  stores  balance  is  $50,000,  that  does  not  tell  us 
what  quantity  and  value  of  the  different  kinds  of  stores  we  carry 
still  remain  in  the  storehouse.  It  gives  no  itemized  detail. 
To  obviate  this  inconvenience,  the  division  of  Stores  account  into 
several  accounts  is  frequently  desirable,  as  mentioned  above1,  but 
this  subdivision  cannot  be  carried  very  far  in  the  general  ledger 
without  becoming  unwieldy.  It  will  serve  if  we  have  say  half  a 
dozen  important  lines  of  stores,  and  50  or  100  kinds  that  do  not 
amount  to  very  much.  We  can  then  provide  separate  stores 
accounts  for  the  former,  and  one  general  account  for  the  latter. 
But  where  our  stores  transactions  are  both  numerous  and  range 
over  a  large  number  of  different  kinds  of  material,  then  it  be- 
comes advisable  to  employ  the  device  of  a  General  Stores  control 
account,  to  which  everything  is  charged  and  credited  in  lump 
sums,  and  a  card  ledger  of  Item  accounts,  to  which  the  individual 
transactions  are  charged  and  credited. 

The  distinction  between  a  Stores  account,  or  several  Stores 
accounts  in  the  General  Ledger,  and  one  Stores  Control  account 
in  the  General  Ledger  controlling  a  number  of  Stores  Item  ac- 
counts in  a  card  ledger,  should  be  thoroughly  grasped.  In  the 
former  case  each  of  the  accounts  ranks  the  same,  and  trans- 
actions must  be  subdivided  before  posting  to  the  General  Ledger 
at  all.  But  when  this  posting  is  done,  it  is  final.  No  further 
detail  is  available  anywhere.  Where  a  Control  account  is 
employed,  all  transactions  can  be  listed  and  posted  in  one 
(monthly)  total  to  the  debit  of  the  account,  and  similarly  to  its 


160      MANUFACTURING  COSTS  AND  ACCOUNTS 

credit.  But  in  this  latter  case  the  individual  transactions  must 
themselves  be  posted,  item  by  item,  to  the  Item  Ledger  Cards, 
so  that  we  have  not  merely  the  balance  of  stores  in  hand  as  shown 
by  the  Control  account,  but  also  we  have  the  balance  of  each 
individual  kind  of  goods  on  hand  as  shown  by  the  Item  Cards. 

These  Item  Cards  represent  the  different  kinds  of  stores  we 
carry.  It  must  not  be  supposed,  however,  that,  where  Item 
Cards  are  in  use,  it  is  necessary  to  have  a  card  for  every  single 
variety  of  stores.  A  card  for  miscellaneous  or  general  stores  can 
be  set  up,  and  everything  charged  and  credited  to  this  that  is 
not  represented  by  a  special  card.  Thus  if  we  have  1000  kinds 
of  stores,  we  may  have  say  200  specially  allotted  cards  for  the 
200  most  important  classes  of  goods,  and  lump  all  the  rest 
together  as  miscellaneous.  This  is  a  matter  for  judgment  in  the 
individual  case,  but  generally  speaking  it  is  far  better  to  have  a 
separate  card  for  each  variety  of  stores,  as  this  minimizes  the 
chance  of  error,  and,  when  the  ledger  is  once  opened,  does  not 
increase  the  work  as  much  as  might  be  thought  at  first  sight. 

At  any  given  moment  the  balances  of  all  the  Item  Ledger 
Cards  should  equal  the  balance  in  the  Stores  Control  account. 
No  charge  or  credit  must  be  made  to  the  Control  account  that  is 
not  made  also  to  one  or  other  of  the  Item  Card  accounts.  The 
Stores  Control  account  lies  in  the  main  stream  of  the  accounting 
system,  while  the  Item  accounts  are  merely  explanatory  of  the 
lump  sum  entries  in  the  Control  account.  It  will  be  inferred, 
therefore,  that  from  a  purely  accounting  point  of  view  thejr  are 
not  essential,  and  in  fact  their  value  is  almost  entirely  an  ad- 
ministrative one.  They  provide  a  control  over  stores,  permitting 
frequent  verification  of  balances  in  hand,  signalling  the  con- 
sumption of  stores  below  a  given  minimum,  and  permitting  in 
some  cases  a  considerable  amount  of  planning  in  advance  of  the 
purchase  requirements,  so  that  the  demands  of  the  shops  take 
nobody  by  surprise. 

In  a  fully  developed  stores  system,  a  Stores  Item  Ledger  Card 
will  be  assigned  to  each  different  kind  of  goods  used  by  the  plant. 
These  may  run  into  the  thousands,  and  it  will  therefore  be 
evident  that  the  physical  arrangement  of  the  cards  and  the 
physical  arrangement  of  the  storehouse  must  be  brought  into  line. 
The  grouping  of  the  cards  must  be  similar  to  the  grouping  of  the 
goods  as  stored.  And  as  it  is  more  convenient  and  much  quicker 
to  pick  out  cards  by  numbers  than  by  names,  a  carefully  worked 


PURCHASES  NOT  IMMEDIATELY  CHARGEABLE     L61 

out  system  of  symbolizing  and  numbering  stores  is  essential  to  the 
smooth  working  of  the  plan. 

The  creation  of  a  symbol  system  is  not  the  business  of  the 
accountant,  inasmuch  as  symbols  are  a  kind  of  shorthand  that 
depends  for  its  usefulness  on  purely  technical  considerations. 
Their  possibilities  will  vary  with  each  kind  of  manufacture,  and 
they  are  found  in  practice  in  all  stages  of  simplicity  or  complexity. 
In  setting  up  a  Card  Item  Ledger,  however,  the  guiding  factor 
will  be  accessibility,  particularly  to  those  items  that  are  handled 
most  frequently.  While  in  a  general  way  the  arrangement  of  the 
cards  must  follow  the  symbol  numbering  system  in  use,  the  cards 
most  in  demand  can  be  separately  and  conveniently  placed,  or 
alternatively  can  be  distinguished  by  tabs  or  other  signs  so  as  to 
be  readily  identified. 

If  we  assume  the  case  of  a  new  plant,  the  working  of  the 
Stores  Item  Ledger  can  be  readily  understood.  As  each  consign- 
ment of  goods  is  received  with  the  corresponding  invoice,  it 
has  a  definite  bin,  rack,  or  other  receptacle  assigned  to  it,  and 
at  the  same  time  a  distinguishing  symbol  number.  A  card  is  then 
headed  with  the  description  of  the  goods  and  with  this  same 
symbol.  The  weight  or  quantity  of  the  consignment  and  the 
purchase  price  are  then  entered  on  the  card,  and  a  price  per  unit 
quantity  figured.  At  the  end  of  a  week,  if  no  stores  have  yet  been 
issued,  the  total  found  by  adding  all  the  card  entries  on  an  adding 
machine  will  necessarily  equal  the  total  of  all  invoices  received 
for  stores  as  disclosed  by  the  amount  charged  against  the  Stores 
Control  account.  In  other  words,  these  Item  Cards  are  the  sub- 
division or  explanation  of  the  Control  account  total. 

In  the  second  week  we  will  suppose  that  purchases  have 
ceased  and  that  issues  have  begun.  Every  issue  will  require 
pricing  out  at  the  current  issue  price  found  on  the  Item  Card, 
and  all  transactions  being  listed,  and  their  total  amount  credited 
to  the  Stores  Control  account,  and  further  each  transaction  being 
individually  credited  on  the  proper  Item  Card,  it  follows  that  if 
we  add  all  the  credits  on  the  Item  Cards  on  an  adding  machine 
they  must  equal  the  total  amount  credited  to  the  Stores  Control 
account.  It  follows,  from  this  and  the  foregoing  paragraph,  that 
as  the  charges  on  the  cards  are  equal  to  the  charges  in  the 
Control  account  and  the  credits  on  the  cards  are  also  equal  to  the 
credit  in  the  Control  account,  then  the  balances  of  all  the  cards, 
if  added  on  an  adding  machine  must  equal  the  balance  in  the 
11 


162      MANUFACTVIUNC  COSTS  AND  ACCOUNTS 


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PURCHASES  NOT  IMMEDIATELY  CJIAECEABLE  1  re- 
stores Control  account.  That  is  to  say,  if  the  balance  in  question 
is  $50,000,  the  cards  will  explain  how  this  balance  is  made  up — so 
much  in  brass  castings  for  valves,  so  much  in  lubricating  oil,  so 
much  in  1-in.  hexagon  nuts,  and  so  forth. 

Figure  32  represents  a  typical  Stores  Item  Ledger  Card. 
In  posting  to  this  card,  the  date  and  order  number  are  entered 
in  the  column  headed  "Transactions,"  the  quantity  and  amount 
of  the  transaction,  if  a  receipt  of  material,  being  entered  in  the 
left-hand  column,  and  if  an  issue,  in  the  right-hand  column. 
To  begin  with,  the  original  or  initial  receipt  of  the  item  is  entered 
under  "Receipts,"  and  its  quantity  and  amount  also  entered  in 
the  column  headed  "Balance."  Then,  as  each  issue  is  entered 
under  "Issues,"  its  quantity  and  amount  is  also  deducted  from  the 
figures  in  the  balance  column  and  the  new  balance  substituted. 
Similarly  any  fresh  receipt  of  material  is  entered  under  receipts 
and  its  quantity  and  amount  added  to  the  figures  in  the  balance 
column.  By  this  means  a  running  or  continuous  balance  is 
kept,  the  object  of  which  is  to  ensure  that  the  stock  of  that 
particular  item  of  stores  shall  not  fall  below  a  certain  minimum 
level  which  has  been  determined  in  advance.  At  the  top  of  each 
card  will  be  entered  both  the  minimum  stock  that  should  be 
always  in  hand,  and  also  the  proper  quantity  to  be  requisitioned 
when  the  minimum  is  approached.  By  this  means  unexpected 
shortages  are  obviated,  and  on  the  other  hand,  excessive  stocks 
are  also  obviated,  since  both  the  minimum  and  the  quantity  to 
be  requisitioned  for  replenishment  are  both  specified. 

At  the  right  hand  of  the  card  a  column  headed  "Current  Price 
for  Issues"  will  be  observed.  To  begin  with,  this  will  be  calcu- 
lated on  the  purchase  price  of  the  goods,  plus  freight  charges 
where  these  are  important  enough  to  be  posted  to  the  account. 
No  further  entry  will  be  necessary  in  tlyis  column  until  a  fresh 
receipt  of  goods  has  been  entered,  and  only  then  if  this  fresh 
consignment  bears  a  different  'price  from  the  earlier  one.  When  this 
happens,  the  entry  is  carried  out  as  usual  and  the  balance  entered 
in  the  balance  column.  A  new  price  is  then  calculated  by 
dividing  the  total  quantity  in  hand  into  the  total  amount  or 
value  in  hand.  The  resulting  figure  is  then  set  in  the  price 
column,  and  all  future  issues  made  at  that  price. 

Figure  33  represents  a  more  advanced  form  of  Stores  Item 
Ledger  Card,  in  which  provision  is  made,  not  only  for  keeping 
account  of  actual  receipts  and  issues  as  they  occur,  but  also  for 


164      MANUFACTURING  COSTS  AND  ACCOUNTS 


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PURCHASES  NOT  IMMEDIATELY  CHARGEABLE     165 

registering  quantities  on  order  from  supply  firms,  and  quantities 
appropriated  to  production  orders  already  received,  but  for  which 
the  goods  have  not  yet  been  drawn  out  of  stores.  It  will  be  seen, 
of  course,  that  these  additional  facilities  are  not  matters  of 
accounting,  but  are  purely  of  administrative  interest.  Never- 
theless, as  the  practice  of  looking  ahead  in  this  way  is  making 
rapid  strides,  it  is  as  well  that  this  additional  function  of  the 
Item  Ledger  Card  should  be  discussed. 

The  middle  portion  of  the  card  is  exactly  similar  to  that  just 
described  and  is  used  in  precisely  the  same  way.  It  takes  care 
of  actual  movements  of  stores  inward  and  outward.  The 
division  on  the  left  hand  headed  "  Orders"  is  intended  to  keep  tab 
on  orders  sent  to  supply  firms  for  the  item,  and  on  deliveries 
made  on  account  of  such  orders.  When  a  purchase  order  is 
sent  out,  the  date  and  order  number  are  entered  in  the  columns 
provided,  and  the  quantity  is  also  entered  in  the  left-hand 
column  of  those  headed  "On  Order."  When  a  delivery  is  made 
the  quantity  is  crossed  off.  If  on  the  other  hand,  only  a  partial 
delivery  is  made,  then  the  original  quantity  is  crossed  off,  but 
the  balance  yet  undelivered  is  placed  in  the  next  column  to  thc 
right.  Thus  if  100  articles  are  ordered,  and  only  75  delivered, 
the  100  is  crossed  off,  and  25  put  in  the  next  column.  A  glance 
at  this  division  of  the  card,  therefore,  shows  exactly  what  quantities 
are  still  to  come  in,  and  also  the  date  and  number  of  the  order. 

This  information  is  chiefly  useful  when  read  in  connection  with 
the  division  on  the  right  of  the  card,  headed  "Appropriations." 
The  object  of  this  is  to  record  future  demands  due  to  production 
orders  on  the  item,  so  that  when  the  balance  actually  on  hand  is 
considered,  and  the  balance  of  undelivered  goods  on  purchase 
orders  also  taken  into  account,  the  storekeeper  can  see  whether 
it  is  necessary  to  requisition  for  further  supplies  of  the  item, 
without  waiting  for  the  minimum  to  be  actually  realized.  Thus, 
if  there  is  a  balance  of  40  articles  on  hand,  and  production  orders 
are  received  and  entered  in  the  appropriations  columns  calling 
for  70  articles  in  the  near  future,  it  will  be  obvious  that  immediate 
steps  should  be  taken  to  increase  the  stock.  But  on  the  other 
hand,  if  the  orders  column  shows  that  a  purchase  order  for  100 
articles  has  been  recently  given  out  and  that  75  articles  have  yet 
to  be  delivered  on  that  order,  then  it  is  obvious  that  the  situation 
is  pretty  safe.  It  is,  of  course,  understood  that  as  an  issue  is  made 
on  any  of  the  production  orders  entered  in  the  appropriation 


1(36      MANUFACTURING  COSTS  AND  ACCOUNTS 

columns,  the  original  quantity  is  struck  out  and  the  new  figure 
representing  unissued  balance  substituted,  just  as  in  the  case  of 
orders,  above  described.  By  this  means  the  appropriation 
columns  show  the  balance  of  quantities  appropriated  to  produc- 
tion orders  but  not  yet  issued,  just  as  the  order  columns  showed 
the  balance  of  quantities  on  purchase  order,  but  not  yet  delivered. 

This  advanced  variety  of  Stores  Item  Ledger  Card  cannot  be 
employed  unless  the  administrative  system  of  the  plant  is  highly 
developed.  It  implies  some  kind  of  planning  department  in 
which  each  production  order  is  dissected  and  a  "bill  of  material" 
made  out  before  actual  manufacturing  operations  are  commenced. 
Unless  a  mechanism  of  this  kind  exists  the  simpler  form  of  ledger 
card  should  be  employed. 

Having  now  shown  how  each  different  kind  of  stores  is,  or  can 
be,  represented  by  an  individual  Stores  Item  Ledger  Card,  which 
will  disclose  at  any  time  the  exact  amount  of  such  item  that 
should  be  on  hand,  we  may  now  proceed  to  discuss  the  regular 
routine  of  storekeeping,  commencing  with  the  receipt  of  goods. 


CHAPTER  V 

STORES   {Continued) 

The  operations  of  storekeeping  begin,  naturally,  with  the 
receipt  of  goods.  The  position  of  the  storekeeper  is  somewhat 
similar  to  that  of  a  banker.  He  is  responsible  for  what  he  receives 
and  this  responsibility  continues  until  he  has  issued  it  against  a 
proper  authority  or  voucher.  It  is  obvious,  therefore,  that  his 
duties  will  commence  with  a  careful  record  of  what  he  receives, 
and  he  must  also  ensure  that  what  he  actually  receives  coin- 
cides with  what  he  is  supposed  to  receive,  i.e.,  deliveries  must  be 
in  strict  conformity  with  orders  and  specifications. 

The  mechanism  by  which  such  conformity  is  insured  will 
vary  in  different  plants  and  industries.  The  checking  of  weights 
and  quantities,  the  inspection  of  quality,  the  verifying  of  con- 
formity to  specification  (which  may  in  some  cases  involve 
chemical  or  mechanical  tests)  are  not  matters  of  accounting. 
We  must  assume,  therefore,  that  each  consignment  is  subjected 
to  all  necessary  scrutiny  in  these  respects,  and  that  on  being 
found  acceptable,  it  is  a  proper  subject  for  entry  in  the  account- 
ing system. 

The  principal  operations  involved  in  recording  a  receipt  of 
stores  are  these: 

Recording  the  quantity  and  description. 

Checking  with  the  order. 

Checking  with  the  invoice. 

Checking  the  invoice. 

Entering  invoice  in  Purchase  or  Voucher  Journal. 

Entering  description  and  price  in  Stores  Received  Book. 

Posting  each  item  to  Stores  Item  Ledger  Cards. 

Posting  total  of  stores  purchases  for  month  to  Stores  Control 
account. 

The  diagram  Fig.  34  shows  the  principal  blanks  and  books 
used  in  connection  with  stores  accounting.  The  Stores  Control 
account  and  its  subsidiary  Stores  Item  Ledger  Cards  are  placed  in 
the  center  of  the  diagram.     The  forms  on  the  left  have  to  do 

167 


168      MANUFACTURING  COSTS  AND  ACCOUNTS 


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STORES  L69 

with  charges  to  Stores  accounts  and  those  on  the  right  to  crediting 
the  same  accounts. 

On  receipt  of  a  consignment,  the  first  accounting  step  is  to 
compare  the  quantity  and  description  with  the  copy  of  pur- 
chase order  which  will  be  on  file.  If  this  is  correct,  a  "Goods 
Received  Note"  (Fig.  35)  is  made  out  in  duplicate.  One  copy 
is  forwarded  to  the  general  office,  and  one  remains  on  file.  The 
copy  sent  to  the  office  awaits  the  arrival  of  the  priced  invoice 
and  is  attached  thereto  if  in  order.  The  invoice  is  then  checked 
up  with  the  purchase  order,  as  to  quantity,  description  and  price, 
extensions  are  checked,  and  the  invoice  certified  as  correct.  The 
first  step  in  actual  accounting  is  then  made  by  entering  the 
invoice  on  the  Purchases  or  Voucher  Journal,  and  allocating  the 
amount  to  the  stores  column.  At  the  month  end  the  total  in 
this  column  is  carried  to  the  debit  of  the  Stores  Control  account 
as  shown  in  the  diagram. 

The  individual  items  of  stores  received  have  now  to  be  charged 
to  the  individual  Stores  Item  Ledger  Cards.  We  have  already 
the  quantity  and  description  of  each  item  on  the  Goods  Re- 
ceived Notes  duplicate  retained  by  the  receiving  clerk.  But 
so  far  the  storekeeper,  or  the  bookkeeper  in  charge  of  the  Stores 
Item  Ledger,  has  no  knowledge  of  the  price  to  be  entered  against 
each  consignment.  To  convey  this  information  to  him  various 
methods  may  be  adopted.  One  way  is  to  require  invoices  in 
duplicate  from  the  supplying  firm.  One  copy  of  these,  after 
certification,  is  passed  to  the  Item  Ledger  keeper  for  his  use. 

A  less  elaborate  method  is  to  pass  the  invoices  themselves 
to  the  Item  Ledger  keeper,  after  they  have  been  entered  on 
the  Purchases  Journal.  They  are  returned  to  the  office  after 
the  necessary  entries  have  been  made  from  them.  A  somewhat 
better  plan  is  to  make  use  of  the  copy  of  the  Goods  Received 
Note  that  was  attached  to  the  invoice.  After  the  latter  has 
been  certified,  the  price  is  marked  on  the  note  in  the  space  pro- 
vided, and  the  note  itself  detached  and  sent  to  the  Item  Ledger 
keeper  who  then  has  before  him  all  the  necessary  data  for  his 
entries.  And  he  can  sort  these  notes  into  any  order  that  will 
facilitate  his  work. 

Whichever  of  these  methods  is  employed,  the  entries  should 
first  be  made  in  a  Goods  Received  Book  (Fig.  36).  This  pro- 
vides columns  for  date,  goods  received  note  number,  supply 
firm  name,  purchase  order  number,  description  of  item,  stores 


170      MANUFACTURING  COSTS  AND  ACCOUNTS 


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STORES 


171 


reference  number,  quantity,  price,  two  columns  for 

and    ledger    card    respectively,    and 

amount.     This    book    is   the   official 

record   of  goods  received.     It  is  the 

official  source  for  charges  to  the  Item 

Ledgers,  and  regulates  the  work  of  the 

stores  bookkeeping  in  other  ways. 

Assuming  that  the  certified  and 
priced  Goods  Received  Note  method 
is  that  employed,  the  ledger  keeper 
begins  by  sorting  his  notes  into  groups 
according  to  the  classes  of  goods.  He 
then  turns  to  the  index  of  Stores 
Reference  Numbers,  which  is  a  clas- 
sified list  of  all  the  different  stores 
carried,  with  their  reference  symbols 
attached  (described  under  Issue  Price 
Register,  below).  These  symbols  he 
marks  on  the  notes.  He  is  then 
ready  to  begin  making  his  entries. 
All  the  entries  indicated  by  the  above 
columns  in  the  Stores  Received  Book 
will  be  easily  understood,  with  the  ex- 
ception of  the  column  headed  "Price 
Register."  This  is  only  used  if  the 
new  consignment  alters,  in  any  case, 
the  issue  price  of  the  item,  as  will  be 
explained  later. 

Having  entered  all  his  notes  and 
endorsed  them  as  entered  by  means 
of  a  rubber  stamp  or  otherwise,  these 
notes  should  then  be  sorted  back  in 
numerical  order,  so  as  to  ensure  thai 
no  notes  have  been  missed  in  the 
course  of  their  various  handlings. 
Missing  numbers  should  be  traced 
and  every  consignment  of  goods  thus 
accounted  for  in  the  Stores  Received 
Book. 

The  next  step  is  to  post,  item  by 
item,   all   the   entries   in   the   Stores 


price  register 


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172      MANUFACTURING  COSTS  AND  ACCOUNTS 

Received  Book  to  the  proper  ledger  card,  as  indicated  by 
the  symbol  number.  As  it  is  easy  to  make  errors  in  such 
numbers,  the  precaution  should  be  taken  of  verification  by 
observing  the  name  of  the  item  on  the  card  at  the  time  of  making 
the  charge.  As  each  item  is  posted,  the  new  balance  is  taken  out 
as  described  above,  and  if  the  new  purchase  price  is  different 
from  the  former  issue  price,  a  new  issue  price  must  be  calculated 
and  entered  in  the  column  provided.  This  new  issue  prico 
must  also  be  entered  in  the  price  register  column  in  the  Goods 
Received  Book,  so  that  the  price  may  be  recorded  on  the  Issue 
Price  Register  as  will  be  described  presently.  As  the  posting 
of  each  item  is  completed  a  check  mark  is  placed  in  the  column 
head  "Ledger  Card"  to  indicate  that  it  has  been  dealt  with. 

When  all  these  operations  are  completed,  the  ledger  cards 
will  be  up  to  date  as  far  as  receipts  are  concerned.  Nothing 
further  can  be  done  until  the  month  end,  when  the  following 
agreement  must  be  made: 

The  total  of  the  stores  column  in  the  Purchase  or  Voucher  Journal 
must  be  agreed  with  the  total  of  the  amount  column  in  the  Stores 
Received  Book.  If  any  discrepancy  exists  it  signifies  that  the 
Stores  Control  account  and  the  Stores  Item  Ledger  accounts 
will  not  agree  if  tested,  and  such  discrepancy  must,  of  course,  be 
hunted  down  and  rectified. 

We  have  now  to  consider  the  other  side  of  the  diagram  (Fig. 
34) .  This  has  to  do  with  the  issues  of  stores,  and  the  mechanism 
whereby  Stores  Control  account  on  the  one  hand  is  credited 
with  the  total  issues  of  stores  for  the  month,  and  the  Item 
Ledger  Cards,  on  the  other  hand,  credited  with  the  individual 
issues  of  stores  items  as  they  occur.  It  has  already  been  stated 
that  before  parting  with  any  item  of  stores,  the  storekeeper 
requires  some  authority  or  voucher,  just  as  a  banker  requires  a 
written  order  or  check.  In  practice,  however,  such  authority 
varies  in  character,  and  does  not  always  take  the  shape  of  a 
specific  written  order  for  each  issue. 

The  difference  between  system  and  "red  tape"  lies  in  the  more 
perfect  adaptation  to  circumstance  of  the  former.  Red  tape  is 
in  fact  due  to  a  kind  of  mental  inertia  that  refuses  to  recognize 
differences  where  they  exist,  and  attempts  to  apply  general 
solutions  to  problems  that  are  really  different.  A  carefully  de- 
signed system  on  the  contrary  is  based  on  a  full  appreciation  of 
consequences.     It  gives  due  weight  to  the  relative  importance 


STORES  173 

of  things.  If,  therefore,  it  is  to  be  recognized  as  a  general  prin- 
ciple that  the  storekeeper  shall  have  authority  for  each  dis- 
bursement of  stores,  that  does  not  necessarily  imply  that  a 
separate  written  order  shall  be  forthcoming  for  the  issue  of  a 
pencil,  for  replenishment  of  an  oil-can,  or  for  a  pad  of  scratch- 
paper. 

Authority  to  the  storekeeper  to  disburse  goods  will  generally 
take  two  forms.  First,  authority  in  the  form  of  standing  orders, 
which  permit  regular  supplies  of  oil,  waste,  files,  stationery  and 
other  current  supplies,  to  be  issued  without  the  formality  of 
written  vouchers,  control  being  based  upon  observation  of  the 
amount  of  such  issues  at  regular  periods.  Secondly,  authority 
in  the  form  of  written  requisitions  or  vouchers,  which  specify  the 
articles  required,  and  the  order  number  to  which  they  are  to  be 
charged. 

These  latter  requisitions,  again,  may  take  various  forms. 
In  some  businesses  by  far  the  larger  part  of  the  stores  that  will 
be  required  on  a  given  production  order  can  be  determined  in 
advance  with  close  precision.  In  such  cases,  the  authority  to  the 
storekeeper  takes  the  form  of  a  specification  or  "bill  of  material" 
enumerating  all  the  items  that  are  required  for  each  order.  It 
is  from  such  bills  of  material  that  the  appropriation  columns  in 
the  Stores  Item  Ledger  described  in  the  last  chapter,  are  filled 
out.  When  this  method  is  in  use,  all  that  is  necessary  to  complete 
the  system  as  far  as  the  storekeeper  is  concerned,  is  some  mechan- 
ism by  which  the  signature  of  the  person  who  actually  draws  out 
each  item  from  stores  can  be  recorded  against  each  such  item. 

In  other  cases,  either  because  the  administrative  system  of 
the  plant  is  not  sufficiently  advanced,  or  on  account  of  the  nature 
of  the  business,  requisitions  are  made  on  the  storekeeper  only  as 
and  when  the  necessity  for  the  item  is  discovered.  Such  requisi- 
tions must  come  from  someone  having  recognized  authority  to 
make  them,  just  as  a  banker  will  only  honor  checks  on  a  corpora- 
tion's account  from  officers  who  have  received  formal  authority 
to  sign  them.  Here  again  there  is  frequently  an  opportunity  for 
red  tape,  namely,  by  so  arranging  that  the  person  signing  shall 
have  only  a  perfunctory  interest  in  the  matter,  as  where  a  busy 
foreman  has  to  countersign  an  order  for  a  few  bolts.  It  is  far 
better  to  issue  the  bolts  to  the  man  using  them,  on  his  own 
application,  leaving  it  to  the  foreman  to  hold  the  man  responsible 
for  any  misuse  of  the  privilege,  which  an  exact  system  of  stores 


174      MANUFACTURING  COSTS  AND  ACCOUNTS 

accounting  could  not  fail  to  bring  to  light  sooner  or  later.  On 
the  other  hand,  if  the  foreman  has  few  enough  men  under  him, 
so  that  he  is  in  close  touch  with  the  detail  of  every  man's  work, 
then  the  requisitioning  of  stores  may  be  confined  to  him. 

The  details  of  such  arrangements  will  vary  with  each  plant 
considered.  Generally  speaking,  however,  articles  of  the  nature 
of  regular  supplies  that  do  not  enter  directly  into  production 
orders  will  be  handled  most  satisfactorily  by  standing  orders 
for  regular  quantities,  while  all  material  entering  into  production 
directly  must  be  authorized  by  either  bills  of  material  or  indi- 
vidual requisitions  or  vouchers.  '  In  all  cases  the  following 
elements  will  be  necessary  to  a  proper  stores  issue  transaction: 

Authority. 

Kind  of  stores. 

Quantity  or  weight. 

Order  number  to  which  chargeable. 

Signature  of  person  taking  away. 


,  Stores  Requisition 

DeDt.  No. 

Qty. 

Description 

Charge  to 

Price 

—       1 F     1 " 

Issued 
By 

Received 
Bv 

y 

Dnt»> 

1  wrc-iiiun 

Fig.  37. — Stores    Issues  Note. 


Figure  37  represents  a  Stores  Requisition  embodying  these 
elements.  Such  blanks  will  be  useful  for  all  the  ordinary  trans- 
actions of  issue.  For  stores  issued  on  standing  orders,  a  rough 
issues  book  can  be  kept  in  which  columns  are  assigned  for  each 
of  the  above  elements,  omitting  the  first.  As  regards  issues 
made  on  bills  of  material  the  procedure  will  vary  according  to  the 
way  in  which  the  issues  are  made.  When  it  is  the  practice  to 
assemble  all  the  items  on  a  bill  of  material,  and  issue  them  in  one 
lot  at  one  time,  the  transaction  is  completed  by  signature  of  the 
bill  by  the  person  taking  away  the  goods.  Where,  on  the  other 
hand,  the  issues  are  made  at  different  times,  it  is  perhaps  simpler 
in  the  end  to  fill  out  a  requisition  for  each  issue,  which  can  be 
.signed  by  the  drawer — a  note  of  the  requisition  number  being 


STORES  175 

made  on  the  bill  of  material,  thus  avoiding  the  possibility  of 

duplicate  withdrawal. 

The  essential  features  of  an  issue  transaction,  from  the  store- 
keeper's viewpoint,  are  the  obtaining  of  a  record  which  shall  clear 
his  responsibility,  and  at  the  same  time  form  the  basis  of  pricing, 
so  that  the  necessary  accounting  entries  of  the  transaction  may 
be  effected.  After  issue  of  the  goods  he  will  be  in  possession  of 
rough  memoranda,  either  in  a  Standing  Order  Issue  Book,  or 
in  the  shape  of  signed  bills  of  material  and  requisitions,  indicat- 
ing quantities  and  descriptions  of  stores  issued,  and  the  next  step 
is  to  ascertain  the  money  value  of  these  transactions,  or  in  other 
words,  to  price  them  out. 

The  pricing  out  of  stores  is  always  a  troublesome  matter  on 
account  of  the  great  variety  of  kinds  and  sizes  usually  involved. 
Every  article,  though  differing  only  minutely  from  another,  as 
for  example  a  series  of  nuts  and  bolts  or  wood-screws,  has  an 
individual  price,  and  to  make  matters  worse  such  prices  in  many 
cases  are  not  stationary,  but  will  vary  with  each  new  consign- 
ment of  goods  received.  It  is  probable  that  greater  inexactness 
creeps  in  at  the  pricing  stage  than  at  all  other  stages  of  store- 
keeping.  Arrangements  for  identifying  items,  and  ascteraining 
their  correct  issue  price,  demand  therefore  somewhat  careful 
consideration. 

In  the  previous  chapter  the  manner  in  which  the  receipt  of  a 
consignment  of  goods  at  a  new  purchase  price  is  entered  on  the 
Stores  Item  Ledger  Card,  and  a  new  issue  price  calculated,  was 
described.  When  transactions  are  few,  this  record  will  suffice, 
as  the  ledger  card  may  be  turned  up,  the  current  issue  price  ascer- 
tained, and  the  necessary  entries  made  all  at  one  time.  Gener- 
ally speaking,  however,  this  simple  procedure  is  impracticable. 
The  ledger  keeper  will  be  too  busy  to  attend  to  both  pricing  and 
posting  and  a  separate  pricing  mechanism  must  be  set  up. 

Figure  38  represents  a  convenient  form  of  Issue  Price  Register. 
This  is  in  the  form  of  a  "Rand"  index,  which  consists  of  slips  of 
paper  enclosed  in  flat  transparent  celluloid  tubes,  each  such  slip 
and  tube  being  independent  of  the  others,  and  the  slips,  or  any 
of  them,  can  be  pushed  up  and  down  in  the  frame  as  required. 
It  follows  that  a  new  slip  can  be  inserted  at  any  point  between 
any  two  existing  slips,  so  that,  if  the  slips  are  arranged  in  alpha- 
betical order  or  by  sizes,  any  new  item  can  be  inserted  in  its 
proper  place.     Just  as  a  card  index  is  in  essence  a  book  with 


176      MANUFACTURING  COSTS  AND  ACCOUNTS 

removable  leaves  (and  the  loose-leaf  derivative  of  the  card  index 
is  actually  a  book  with  removable  leaves)  so  the  "Rand" 
index  is  a  leaf  with  removable  lines.  Its  advantage  over  a  card 
index  is  that  each  leaf  can  be  run  down  with  the  eye,  exactly  as  a 
dictionary  or  a  directory,  saving  a  great  deal  of  time  in  turning- 
over  cards  to  find  the  required  item.  If,  for  example,  we  have 
one  leaf  devoted  to  "wood-screws,"  then  all  the  range  of  sizes 
(up  to  about  80)  are  displayed  before  the  eye,  and  the  required 
size  and  its  price  can  be  picked  out  more  quickly  than  by  any 
other  method  of  indexing.  Also,  should  a  new  size  of  screw  make 
its  appearance  in  stores,  a  new  slip  bearing  its  data  can  be  placed 
in  exactly  the  correct  sequence,  according  to  the  manner  in  which 
the  reference  has  been  arranged. 

It  will  be  easy  to  understand  that  a  number  of  "Rand "index 
leaves,  with  their  line  slips,  can  be  arranged  so  that  any  item  of 


Class  of  Item. 


"V 


Ref. 
No 


Item. 


Size  or  other 
Identification 


Changes  in  Issue  Price 


Issue 
Price 


Fig.  38. — Issue  Price  Register  (Rand  index  type). 


stores  can  be  found  in  short  order.  The  leaves  being  classified 
by  kinds  of  goods,  form  not  only  a  pricing  index  but  also  a  loca- 
tion index  to  the  contents  of  the  stores,  if  the  stores  reference 
numbers  are  a  guide  to  the  location,  as  they  should  be. 

The  column  ruling  of  the  slips  will  usually  provide  the  follow- 
ing data: 

Name  of  item. 

Size,  or  other  identification. 

Stores  reference  number. 

Current  price. 

In  addition  to  the  ruling  on  each  slip,  each  leaf  will  have  a  tab 
at  the  top  or  side,  specifying  the  class  of  stores  dealt  with  on  such 
leaf.  Examples  of  such  tab  headings  are:  "Wood-screws,"  "Forg- 
ings,"  "Brass  castings,"  "Dyes,"  "Oils,"  "Files,"  etc. 

Supposing  such  an  index  to  be  compiled  at  the  first  starting  of  a 


STORES  177 

plant,  it  will  be  evident  that  arrangements  must  be  made,  first, 
for  the  regular  and  systematic  addition  of  new  varieties  of  stores, 
and  secondly,  for  the  regular  alteration  of  issue  prices,  whenever, 
by  the  reduced  or  increased  price  of  new  consignments,  the 
former  issue  prices  are  no  longer  correct.  Such  an  arrangement 
was  provided  by  means  of  a  special  column  in  the  <  roods  Received 
Book  (see  above)  headed  "Price  Register."  The  use  of  this 
column  will  now  be  explained. 

When,  in  posting  from  the  Goods  Received  Book  to  the  Stores 
Item  Cards,  it  is  found  that  a  new  issue  price  is  involved,  this  is 
worked  out  and  entered  in  the  price  column  on  the  card,  as 
described  above,  and  also  entered  in  the  "Price  Register"  column 
in  the  Goods  Received  Book.  The  same  procedure  is  followed  if 
the  item  is  a  new  kind  of  stores  requiring  a  new  Stores  Item  Card 
to  be  made  out  for  it.  Only  in  the  latter  case,  an  indication, 
such  as  the  letter  "N"  is  placed  alongside  the  price,  to  show  that 
a  new  price  slip  must  be  made  out  for  the  item.  A  glance  down 
this  column  in  the  Goods  Received  Book  will  show  the  pricing 
clerk  exactly  what  price  slips  have  to  be  altered,  and  what  new- 
ones  are  necessary.  The  data  can  be  kept  up  to  date  in  this  way 
with  a  minimum  of  trouble. 

The  first  step  in  accounting  for  stores  issues  is,  then,  the 
pricing  out  of  the  items  issued  and  the  affixing  of  the  symbol 
number,  if  this  is  not  already  done.  The  next  step  is  to  compile 
an  official  Stores  Issues  Book,  which  bears  the  same  relation  to 
the  credit  side  of  the  Stores  Item  Ledger  Cards  as  the  Stores 
Received  Book  does  to  their  debit  side.  The  information  to  be 
provided  for  in  this  book  will  naturally  be  the  same  as  that  on  the 
Stores  Requisition  Notes. 

As  the  number  of  transactions  of  stores  issues  is  commonly 
much  greater  than  that  of  goods  received,  it  is  desirable  to 
economize  work  as  much  as  possible.  To  this  end  it  is  advisable 
to  post  to  the  Item  Ledger  Cards  from  the  original  documents, 
and  make  summaries  in  the  Stores  Issues  Book  only  by  groups  of 
items  or  by  departments  as  may  be  found  convenient.  But  as  it 
is  most  important  that  the  total  in  the  Stores  Issue  Book  should 
coincide  with  the  actual  credits  to  the  card  ledger,  special  pre- 
cautions must  be  taken. 

As  soon  as  all  the  stores  requisitions  have  been  priced  out, 

they  should  be  added  on  an  adding  machine  to  ascertain  the  total 

amount  involved.     They  should  also  be  consecutively  numbered 
12 


1  7S      MANUFACTURING  COSTS  AND  A('(  '<)l  'NTS 


by  a  numbering  stamp.  The  amount  and  the  first  and  last 
numbers  having  been  temporarily  entered  in  the  Stores  Issues 
Book,  the  notes  may  be  handed  to  the  card  ledger  keeper  for 
posting  to  his  cards.  As  he  does  this  he  should  stamp  each  Note 
to  that  effect.  Whatever  documents  are  handed  to  him  should 
be  treated  in  the  same  way,  i.e.,  some  of  the  documents  may  be 
Stores  Requisition  Notes,  others  Bills  of  Materials,  and  others 
again  the  pages  of  the  rough  book  kept  for  recording  issues  against 
Standing  Orders.  They  should  all  be  consecutively  numbered 
and  all  included  in  the  total.  When  he  has  entered  all  on  his 
ledger  cards,  they  are  returned  to  the  clerk  in  charge  of  the  Stores 
Issues  Book,  and  his  first  step  is  to  see  that  all  the  numbers  are 


Total 
Stores    Issued          Date                      SViPPt    No                         ,?or     ? 

Sheet 

Order  No. 

Dept, 

Description 

Number 

$ 

Job  No. 

Weight 

Order  No. 

Dept. 

Description 

Number 

$ 

Job  No. 

Weight 

Order  No. 

Dept. 

Description 

Number 

$ 

Job  No. 

Weight 

Fig.  39. — Stores  Issue  Record  (sectional  type). 

returned,  and  that  the  total  amount  is  accounted  for.     He  then 
can  proceed  with  entering  up  the  Stores  Issues  Book. 

The  grouping  of  the  items  of  stores  issues  in  this  book  will 
depend  upon  the  arrangement  of  the  plant  in  the  first  place,  and 
secondly,  on  the  nature  of  the  monthly  returns  that  are  expected 
by  the  administration.  Stores  issued  on  standing  orders  will 
form  one  group,  those  of  production  orders  another  group.  Both 
these  classes  may  be  subdivided  in  various  ways.  Then  in  some 
plants  a  distinction  will  be  made  between  departments,  all  the 
items  issued  to  one  department  being  entered  separately  from 
those  in  other  departments.  These  distinctions  will  be  dis- 
cussed at  a  later  stage,  it  being  sufficient  to  note  now  that  the 
whole  of  the  stores  issues  must  be  entered  in  either  one  or  several 
totals  in  the  Stores  Issues  Book. 


STORES  17'.- 

Figure  39  represents  a  simple  form  of  Stores  Issues  record, 
suitable  for  a  small  plant  or  a  repair  shop.  As  each  issue  of 
stores  is  made,  whether  on  standing  or  production  orders,  the 
quantity,  description,  order  number,  department,  etc.,  are 
entered  on  one  of  the  "sections"  between  the  heavy  black  lines. 
Only  one  item  is  entered  on  one  section.  As  each  sheet  is  filled 
out,  it  is  turned  over  to  the  pricing  clerk  to  be  priced,  and  the 
symbol  number  added,  and  at  the  end  of  the  day  or  other  con- 
venient period,  each  sheet  is  added  and  the  total  amount  entered 
on  the  stub  at  the  top.  All  the  stubs  being  aggregated,  a  tem- 
porary total  is  entered  on  the  Stores  Issues  Book  and  the  sheets 
are  then  passed  under  a  knife  (a  cutting  machine  such  as  is  used 
for  photographic  prints  answers  very  well)  and  cut  across  at  the 
heavy  black  lines.  Each  item  is  thus  set  free  so  that  it  can  be 
sorted  into  any  grouping  desired. 

The  sections  are  first  sorted  in  this  way  into  groups  represent- 
ing standing  orders  and  production  orders  respectively,  and  then 
any  further  subdivision  by  departments  or  series  of  order  numbers 
is  made  by  further  sorting,  and  the  final  groups  of  sections  are 
then  aggregated  on  an  adding  machine  and  their  amounts  entered 
on  the  Stores  Issued  Book  (Fig.  39A).  The  total  of  such  groups 
must  of  course  agree  with  the  total  of  the  stubs  temporarily 
entered  as  above  described. 

The  sections  are  then  ready  for  the  use  of  the  Item  Ledger 
clerk,  who,  in  his  turn,  sorts  them  into  whatever  grouping  is 
most  convenient  for  him,  and  proceeds  to  post  them  to  credit  of 
his  ledger  cards. 

Where  many  transactions  have  to  be  posted  daily  to  a  Card 
Item  Ledger,  and  balances  taken  out,  the  work  will  be  facilitated 
by  using  a  keyboard  arithmometer  calculating  machine  of  the 
"positive"  type,  such  as  the  Monroe.  The  old  balance  is  struck 
on  the  keyboard  and  transferred  by  a  turn  of  the  handle  to  the 
arithmometer  dials,  the  quantity  and  amount  of  the  issue  or 
receipt  is  then  struck  on  the  keyboard,  and  a  right-  or  left-hand 
turn  of  the  handle  either  adds  or  deducts  the  figures,  leaving  the 
new  balance  visible  in  the  dials.  The  importance  of  correct 
calculation  of  balances  makes  the  use  of  a  machine  advisable 
where  such  balances  are  being  taken  out  hour  after  hour. 

The  result  of  the  transactions  as  to  stores  issues  above  de- 
scribed may  now  be  seen  as  a  whole.  First,  we  shall  have  a 
complete  itemized  record  of  each  issue  in  the  form  of  notes, 


180     MANUFACTURING  COSTS  AND  ACCOUNTS 


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STORES  181 

bills  of  material,  rough  issue  book,  or  perhaps  of  the  "sections" 
just  described.  The  actual  form  is  of  very  little  consequence 
provided  it  fulfils  the  conditions  laid  down  as  essential.  This 
record  is  then  priced  out  and  the  proper  stores  reference  symbol 
number  affixed,  if  this  has  not  already  been  done,  and  the  whole 
of  the  items  are  then  summarized  in  one  or  more  groups  and 
entered  in  a  Stores  Issues  Book.  Each  item  is  also  credited 
individually  to  the  Item  Ledger  Card  as  indicated  by  the  symbol 
number.  We  have  therefore  a  number  of  individual  credits  on 
the  cards  and  a  total  of  these  credits  in  the  column  of  the  Stores 
Issues  Book.  The  next  step  is  to  verify  this  amount  in  some 
way,  and  to  observe  how  it  agrees  with  a  crc<  1  i  t  made  from  another 
source  to  the  Stores  Control  account.  Before  this  can  be  under- 
stood some  little  explanation  is  necessary. 

The  object  of  recording  each  issue  of  stores  in  detail  is  not 
only  for  storekeeping  purposes.  It  is  also  necessary  for  ascer- 
taining manufacturing  cost.  The  standing  orders  above  referred 
to,  for  example,  represent  various  classes  of  expense  such  as  re- 
pairs, cleaning  and  maintaining  machinery,  running  the  powrer 
plant,  etc.,  that  do  not  go  directly  into  any  production  order. 
It  is  necessary  to  ascertain  the  value  and  nature  of  stores  issued 
against  each  of  these  kinds  of  expense.  The  standing  orders  are 
arranged  so  that  such  expense  can  be  grouped  intelligibly. 

Similarly  with  regard  to  production  orders.  These  are  issued 
for  the  purpose  of  keeping  the  expenditure  on  each  such  order 
distinct  from  that  on  the  others.  Therefore  even  though  no 
Stores  Item  Ledger  were  kept,  it  is  still  necessary  to  record  and 
price  out  every  item  issued  from  stores  so  that  its  value  may  be 
entered  on  Cost  Sheets.  Every  order,  whether  standing  or  pro- 
duction, has  its  own  individual  Cost  Sheet. 

Further  than  to  note  their  existence  and  their  purpose  we  have 
nothing  to  do  with  Cost  Sheets  at  the  present  moment.  It  is 
necessary,  however,  to  state  that  all  the  documents  used  by 
the  card  ledger  clerk  for  entering  up  his  credits  (i.e.,  Notes,  bills 
of  material,  sections,  etc.)  are  also  used  subsequently  by  the  cost 
clerk  for  the  purpose  of  making  charges  to  his  Cost  Sheets.  The 
items  have  been  taken  out  of  stores,  and  they  have  been  put  into 
manufacturing.  So  far  the  blanks  and  books  described  have  had 
to  do  only  with  the  former  set  of  transactions.  The  way  in  which 
Cost  Sheets  are  arranged  and  charged  will  be  discussed  later. 

It  is  sufficient  to  say  here  that  they  are  so  charged  and  that 


182      MANUFACTURING  COSTS  AND  ACCOUNTS 

every  item  of  stores  issued  is  represented  by  an  entry  on  one  or 
another  of  the  Cost  Sheets.  Consequently  if  we  make  a  list  of 
the  stores  values  charged  to  Cost  Sheets  during  any  period,  that 
list  can  be,  and  is,  used  as  the  official  source  of  crediting  Stores 
Control  account  and  charging  manufacturing  accounts  of  various 
kinds  with  the  value  of  stores  consumed.  It  is  this  total  that 
must  be  checked  with  the  total  in  the  Stores  Issue  Book,  to  ensure 
that  all  the  credits  to  Item  Cards  when  aggregated  equal  the 
credit  made  from  manufacturing  to  Stores  Control  account. 

The  diagram  of  stores  receipts  and  issues,  Fig.  34,  shows 
the  relation  of  the  different  books  and  blanks  involved.  The 
Stores  Issues  Note  (or  its  equivalent  in  other  form)  is  connected 
by  a  double  line  with  the  price  record,  and  by  single  lines  with 
the  Stores  Issues  Book  on  the  one  hand,  and  with  the  Cost  Sheets 
on  the  other.  From  the  Stores  Issues  Book  lines  are  drawn  to 
the  credit  side  of  the  Item  Cards,  because  theoretically  such 
credits  are  made  from  the  Stores  Issues  Book,  though  to  econo- 
mize work  they  are  usually  made  direct  from  the  original  docu- 
ment and  only  a  summary  entered  in  the  Stores  Issues  Book. 
It  will  be  seen  therefore  that  the  story  of  the  stores  issues  as  told 
by  the  Item  Ledger  Cards  will  be  the  same  as  that  told  by  the 
Cost  Sheets,  only  the  transactions  will  be  classified  in  an  entirely 
different  way,  namely,  according  to  kinds  of  stores  in  the  one 
case,  and  according  to  order  numbers  (that  is  to  say  according 
to  the  uses  made  of  the  stores)  in  the  other. 

It  will  also  be  understood  that  if  we  list  the  entries  on  the  Cost 
Sheets  which  have  reference  to  stores  issues  during  say  a  month, 
the  amount  ought  to  agree  with  the  summaries  in  the  Stores 
Issues  Book  for  the  same  period.  This  listing  is  effected  in  a 
journal,  or  rather  in  two  journals,  one  relating  to  standing  orders 
(or  burden)  and  the  oilier  relating  to  production  orders.  And 
from  these  journals,  only  one  of  which  is  shown  in  the  diagram, 
a  credit  is  made  to  Stores  Control  account,  which  credit  must  be 
agreed  with  the  total  of  stores  issued  as  shown  by  the  Stores  Issue 
Book. 


CHAPTER  VI 
STORES  (Continued)— CONTINUOUS  INVENTORY 

The  whole  c}rcle  of  stores  transactions  has  now  been  de- 
scribed. As  regards  the  main  stream  of  accounting  it  is  very 
simple,  as  will  be  seen  from  an  inspection  of  the  diagram,  Fig.  34. 
The  invoice,  representing  a  purchase  of  stores,  is  entered  on  the 
Purchases  or  Voucher  Journal,  and  this  ultimately  credited  to 
the  supply  firm  (or  to  Accounts  Payable)  and  charged  to  Stores 
Control  account.  The  Stores  Issue  Note  representing  an  issue 
of  stores  is  entered  on  a  Cost  Sheet,  and  the  current  charges  to 
this  Cost  Sheet  being  entered  in  a  Manufacturing  Journal  at 
the  end  of  the  month,  the  value  of  the  issue  is  ultimately  credited 
to  Stores  Control  account  and  charged  to  one  of  the  manufactur- 
ing accounts.  At  any  given  moment  there  will  be  a  balance  in 
Stores  Control  account  representing  the  value  of  stores  on  hand 
and  not  yet  issued. 

In  some  businesses  this  is  all  that  is  done  to  control  store- 
keeping.  In  other  businesses  more  than  this  is  felt  to  be  nec- 
essary, and  in  that  case  a  set  of  subsidiary  Stores  Item  accounts 
are  set  up  and  charged  and  credited  in  the  manner  described 
above.  The  balances  in  these  Item  Ledger  Cards  if  added 
together  will  equal  the  amount  of  the  balance  in  Stores  Control 
account  at  any  moment. 

It  has  also  been  explained  that  one  object  of  keeping  Item 
Cards  is  to  enable  watch  to  be  kept  on  the  replenishment  of 
stores,  and  in  some  cases,  the  planning  of  supply  some  distance 
ahead  is  also  effected  by  using  space  on  each  card  for  a  record  of 
purchase  orders  given  out,  and  appropriations  to  production 
orders. 

Lastly,  the  employment  of  Item  Cards  enables  the  trouble- 
some and  costly  process  of  periodical  "stock-taking"  to  be 
eliminated.  In  place  of  the  general  upset  involved  in  stock- 
taking, a  regular  routine  is  set  up  called  a  "perpetual"  or 
"continuous"  inventory  which  may  now  be  briefly  described. 

As  the  balance  of  each  item  of  stores  that  is  supposed  to  be 

183 


184      MANUFACTURING  COSTS  AND  ACCOUNTS 


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day — a  fresh  balance  being 
made  after  every  new  re- 
ceipt or  issue — it  will  be 
obvious  that  it  is  a  simple 
matter  to  verify  the  accuracy 
of  such  balance  by  simply 
counting  or  weighing  the  ar- 
ticles in  question.  If  then 
matters  are  so  arranged  that 
the  items  most  frequently 
used,  and  those  of  which  the 
unit  value  is  high  (such  as 
brass  or  copper)  are  verified 
at  frequent  intervals,  and 
the  less  important  materials 
less  frequently  several  valu- 
able results  are  attained.  In 
the  first  place,  the  physical 
verification  is  more  likely  to 
be  correctly  made  than  when 
done  under  the  pressure  and 
scramble  of  a  general  stock- 
taking. Secondly,  the  fact 
that  frequent  comparison  of 
actual  stocks  with  their  book 
amounts  is  made  has  a  satis- 
factory influence  on  the  men 
who  are  responsible  for  issues, 
and  makes  them  more  care- 
ful to  see  that  proper  record 
is  made  of  every  transaction, 
and  that  nothing  is  given  out 
without  a  record.  Thirdly, 
expensive  mechanical  appli- 
ances for  weighing  and  count- 
ing,  that  greatly  reduce  the 
amount  of  the  work  and  in- 
crease its  accuracy,  can  be 
employed,  since  a  large  num- 
ber of  such  operations  are 
not  being  carried  on  simul- 


CONTINUOUS  INVENTORY  185 

taneously.  Finally,  stronger  confidence  is  felt  in  the  accounting 
when  it  is  known  to  be  supported  by  a  continuous  verification 
of  this  kind. 

The  system  of  continuous  inventory  should  be  carefully 
planned  in  advance.  The  whole  of  the  stores  should  be  reviewed 
and  scheduled  so  that  the  stocktakers  give  the  right  amount  and 
frequency  of  attention  to  the  important  items.  And  systematic 
record  of  discrepancies  must  be  made,  not  only  because  they 
must  be  adjusted  in  the  books,  but  also  to  ascertain  where  and 
why  errors  occur  with  greatest  frequency. 

Figure  40  shows  a  suitable  form  of  Continuous  Inventory 
Report.  The  principal  provisions  are:  symbol  number;  de- 
scription of  item,  size,  etc.;  quantity  and  amount  of  balance  on 
hand  as  shown  by  the  Item  Ledger  Card;  quantity  and  amount 
of  articles  actually  on  hand  as  found  by  survey;  and  two  further 
columns  to  take  care  of  the  difference  between  ledger  and  survey 
values,  one  being  for  all  cases  in  which  a  surplus  is  found,  that 
is  to  say,  where  more  articles  exist  in  the  storehouse  than  are 
indicated  by  the  Item  Card,  and  the  other  for  all  cases  where  a 
deficit  is  found,  that  is,  where  fewer  articles  are  found  by  the 
survey  than  indicated  by  the  Item  Card. 

The  question  of  the  disposal  of  discrepancies  is  a  matter  of 
some  difficulty,  since  it  is  not  obvious  at  this  stage  how  they 
have  originated.  Of  course  if  a  discrepancy  is  serious  in  amount, 
whether  of  the  nature  of  a  surplus  or  a  deficiency,  every  effort 
must  be  made  to  trace  it,  and  discover  how  the  error  has  been 
brought  about.  But  minor  errors  will  certainly  be  found 
and  though  each  of  these  may  be  inconsiderable,  and  moreover 
some  being  deficits  and  some  surpluses,  will  tend  to  cancel  out, 
still  it  is  obvious  that  they  must  be  dealt  with  somehow  in  the 
accounts  in  a  systematic  way. 

If,  on  taking  an  inventory  of  a  particular  item,  it  is  found  that 
there  is  a  deficiency,  say  only  50  articles  worth  $10  where  the 
Item  Ledger  Card  shows  an  expected  balance  of  80  articles 
this  discrepancy  may  have  arisen  from  one  of  several  causes. 
First,  it  may  have  been  due  to  a  failure  to  post  a  credit  from  the 
Stores  Issues  Note  to  the  Item  Ledger  Card.  Or  it  may  have 
been  due  to  the  articles  having  been  taken  out  of  stores  with- 
out any  record  being  made  of  their  issue.  Or  such  a  record  may 
have  been  made,  but  lost.  This  loss  may  have  taken  place 
(in  the  absence  of  proper  precautions  as  described  above)  alter 


186      MANUFACTURING  COSTS  AND  ACCOUNTS 

entry  was  made  on  the  Stores  Issues  Book,  and  before  entry 
on  the  ledger  card. 

Now  some  of  these  errors  are  confined  to  the  Stores  Item 
Ledger  and  some  have  a  wider  effect.  A  mere  failure  to  post 
an  entry  would  be  rectified  by  making  a  belated  entry  after 
survey  had  shown  the  discrepancy  to  exist.  But  if  an  issue  has 
been  made  without  any  record,  then  Stores  Control  account, 
Cost  Sheets,  and  Stores  Issue  Book  will  all  be  wrong,  as  well  as 
the  Stores  Item  Ledger  itself.  If  a  record  was  lost  between  the 
Stores  Issues  Book  and  the  ledger  clerk,  this  would  have  the 
effect  of  a  failure  to  post,  and  could  be  rectified  in  the  same  way, 
but  if  the  documents  are  used  by  the  cost  clerk  after  the  ledger 
clerk,  then  Cost  Sheets  would  be  in  error  also. 

If  it  is  possible  to  add  the  balances  on  all  the  cards  on  an  add- 
ing machine  at  the  end  of  each  month,  and  check  the  total 
so  obtained  with  the  total  in  Stores  Control  account,  and  this 
can  readily  be  done  if  the  number  of  cards  is  not  too  great,  then 
we  divide  errors  at  once  into  twro  classes — errors  of  posting  and 
failures  to  record  issues.  Discrepancy  between  the  total  in  the 
Control  account  and  the  aggregate  total  of  all  the  cards  is 
obviously  a  bookkeeping  error,  but  if  these  agree,  and  dis- 
crepancies are  found  between  the  item  card  balance  and  actual 
survey,  these  latter  will  be  due  to  either  failure  to  record  issues 
or  to  incorrect  record  of  issues. 

With  knowledge  of  the  correctness  of  the  card  totals,  rectifica- 
tion of  discrepancies  can  be  made  on  a  surer  basis.  If  during 
a  month  a  net  shortage  of  stores  amounting  to  $50  is  discovered 
by  survey,  this  amount  is  really  chargeable  to  Manufacturing, 
since  it  represents  items  that  should  have  been  charged  out  but 
have  not.  As  it  will  probably  be  impossible  to  ascertain  to 
what  order  number  it  ought  to  have  been  charged  (unless  any 
individual  item  is  considerable)  all  we  can  do  with  it  is  to  charge 
it  to  Works  Expense,  by  which  means  it  will  ultimately  be  dis- 
tributed over  Production  in  the  shape  of  burden.  This  can  be 
done  by  a  journal  entry  each  month. 

On  the  other  hand,  if  a  comparison  of  the  totals  of  all  the 
cards  with  the  balance  in  Stores  Control  account  reveals  a 
larger  balance  in  the  item  cards  than  in  the  Control  account,  this 
discrepancy  is  not  chargeable  against  anything,  because  the 
Control  account  balance  is  the  true  accounting  balance,  and 
the  Item  Cards  are  mere  memoranda  which  have  failed  to  tally 


CONTINUOUS  INVENTORY  187 

with  the  official  account.  In  general  such  a  discrepancy  will 
mean  failure  to  post  one  or  more  stores  issue  items,  though,  of 
course,  it  may  also  imply  a  simple  clerical  error  either  in  entry 
or  calculation  of  balances.  If  such  errors  persist,  the  remedy 
is  more  careful  posting  and  in  particular,  verification  after  each 
set  of  postings  of  the  amounts  so  posted,  and  the  resulting 
balances.  This  is  troublesome  and  takes  time,  but  on  the 
other  hand  incorrect  records  are  worse  than  useless. 

The  simplest  way  of  verifying  postings  of  stores  issues  is  'to 
enter  them  in  batches  of  say  50  at  a  time.  First  the  total  charges 
on  the  50  notes  are  added  on  a  machine.  Then  the  postings  are 
made,  the  former  balances  being  noted  on  a  long  slip  of  paper. 
The  newT  balances  are  made,  entered  on  the  card,  and  also  on  the 
slip  of  paper  alongside  the  previous  balance.  When  all  the  50 
entries  have  been  completed,  the  old  balances  on  the  slip  are 
added  up,  and  the  original  total  of  charges  added  to  this  amount. 
The  two  together  will  equal  the  total  of  the  new  balances.  If  a 
discrepancy  appears,  the  list  is  cut  in  half,  and  the  additions  made 
on  each  half.  This  will  confine  the  error  to  one  of  25  entries, 
which  can  then  be  compared  until  the  faulty  one  is  discovered. 
Generally  speaking  the  idea  is  to  confine  possible  error  to  small 
groups  of  entries  and  clear  up  the  verification  of  each  group  before 
proceeding. 

This  question  of  errors  in  Stores  Item  Ledgers  and  discrep- 
ancies with  surveys  has  been  discussed  at  some  length  because  not 
infrequently,  a  system  of  the  kind  is  installed  and  subsequently 
abandoned  as  unworkable  owing  to  the  discouraging  amount 
of  errors  and  discrepancies  constantly  coming  to  light.  And  of 
as  has  been  pointed  out,  such  errors  may  mean  several  things, 
may  come  from  various  sources,  and  demand  different  methods 
of  rectification.  But  the  discouragement  experienced  from  the 
high  percentage  of  discrepancies  would  be  largely  obviated  if  it 
was  felt  that  the  balances  on  the  Item  Cards  were  at  least  to  be 
depended  on  from  the  bookkeeping  viewpoint.  This  can  come 
about  only  by  monthly  comparison  of  the  total  balances  in  the 
Item  Cards  with  the  balance  in  the  Stores  Control  account,  and 
in  general  a  perfect  agreement  between  these  can  only  be  secured 
by  a  system  of  verifying  postings  as  they  are  made,  as  just 
described. 

But  if  we  are  sure  of  the  correctness  of  our  cards,  and  that  they 
really  represent  all  the  recorded  transactions,  thou  the  field  is 


188      MANUFACTURING  COSTS  AND  ACCOUNTS 

narrowed  down  considerably  if  surveys  disclose  considerable  dis- 
crepancies. For  as  pointed  out  above,  such  discrepancies  can 
only  arise  from  carelessness  in  making  issue  records,  either  in 
the  way  of  issuing  stores  without  any  record  at  all,  or  from  in- 
correct records  as  to  kinds  and  amounts.  This  being  the  case, 
the  proper  remedy  is  obvious  and  is  not  difficult  to  apply. 

There  is,  however,  another  possible  error  in  Stores  records 
of  an  even  more  subtle  character,  easy  to  make  and  very  diffi- 
cult to  detect.  This  is  an  error  in  pricing.  If,  in  pricing  out  a 
Stores  Issue  Note,  for,  say  15  articles,  the  unit  price  is  read  as 
18  cts.  instead  of  23  cts.,  or  if  a  wrong  extension  is  made,  the 
error  is  fundamental,  and  goes  through  the  whole  stream  of 
accounting  with  very  little  chance  of  detection,  unless  Stores 
Items  Cards  are  in  use,  and  not  very  readily  even  then. 

The  only  way  in  which  such  an  error  could  be  discovered, 
unless  by  accident,  would  be  at  the  moment  of  entering  a  new 
consignment  of  stores  received,  and  the  averaging  out  of  a  new 
issue  price.  It  would  only  then  be  discovered  if  the  new  price 
looked  suspicious  to  the  ledger  clerk.  It  is  therefore  desirable  to 
have  all  issue  pricing  checked  carefully  before  proceeding  to  make 
use  of  the  figures,  as  in  no  other  way  can  errors  be  detected  with 
certainty,  and  even  if  detected  at  a  later  stage  it  would  involve 
too  much  trouble  to  set  them  right  unless  the  individual  amounts 
were  considerable.  Moreover,  such  attempts  at  rectification 
after  the  event  are  apt  to  lead  to  immense  confusion,  as  unless 
altered  at  every  stage  of  their  career  (as  for  instance  on  the  Stores 
Issue  Note,  in  the  summary  total  in  the  Stores  Issue  Book,  on 
the  Item  Cards,  and  on  the  Cost  Sheets)  it  would  simply  mean 
that  balances  are  upset,  with  probably  a  long  search  before  the 
cause  was  found. 

In  all  the  foregoing  discussion  of  the  routine  of  recording 
receipts  and  issues  of  stores,  it  has  been  taken  for  granted  that 
goods  are  invariably  coming  in,  and  stores  invariably  going  out. 
As  a  matter  of  practice  this  is  not  always  so.  Goods  are  some- 
times returned  to  the  suppliers,  and  stores  issued  are  sometimes 
returned  from  the  shops.  As  regards  the  former  class  of  trans- 
action, this  will  not,  in  most  cases,  affect  the  accounting,  since 
such  rejections  are  commonly  made  before  the  invoice  has  been 
accepted,  or  any  record  made  of  the  receipt.  But  as  regards  issues, 
this  is  not  so.  Returns  of  surplus  material  into  stores,  which 
has  been  taken  out  but  not  all  used  for  a  given  piece  of  work, 


CONTINUOUS  INVENTORY  189 

are  of  not  infrequent  occurrence  in  some  cases.  Such  transac- 
tions can,  if  not  too  many,  be  dealt  with  in  the  ordinary  journals 
and  Received  and  Issue  Books,  by  making  the  entries  in  red  ink, 
thereby  signifying  that  the  usual  charges  and  credits  are  reversed. 
Postings  can  then  be  made  accordingly.  But  in  large  plants  it 
is  sometimes  desirable  to  keep  separate  journals  and  receipt  and 
issue  books  for  such  purposes. 

Such  books  would  be:  Purchases  Returned  Journal ;  Goods  Re- 
turned Book  on  the  purchases  side;  and  Stores  Returned  Book 
on  the  issues  side.  Goods  Returned  Notes  and  Stores  Returned 
Notes  would  also  be  provided.  The  relations  of  these  various 
books  and  documents  will  be  obvious  without  further  description, 
especially  on  studying  the  diagram,  Fig.  34,  as  they  simply  reverse 
the  operations  which  have  been  fully  described  above.  It  will, 
of  course,  be  understood  that  no  entries  will  be  made  in  these  books 
except  to  reverse  charges  or  credits  that  have  already  been  made. 
Thus  if  a  consignment  of  goods  has  been  received,  but  not 
accepted  in  any  way,  or  any  entry  made  regarding  it,  it  is  obvious 
that  it  does  not  require  taking  out  of  the  records  by  a  reverse 
operation.  But  where  such  books  are  provided  it  is  usual  to 
enter  all  transactions  as  they  occur,  so  that,  for  example,  an  in- 
voice would  be  passed  through,  and  record  of  its  rejection  made  in 
the  Purchase  Returned  Journal.  Whether  or  not  this  elaboration 
is  necessary  or  desirable  depends  upon  local  circumstances. 

In  the  absence  of  a  proper  mechanism  for  recording  return  of 
surplus  stores,  however,  the  bad  practice  frequently  obtains  of 
issuing  certain  kinds  of  stores  on  memorandum,  such  for  example 
as  a  piece  of  bar  steel,  from  which  a  piece  has  to  be  cut.  Then 
when  the  steel  is  returned,  the  net  weight  used  is  made  the  basis 
of  a  stores  issue  note,  and  passed  forward  in  the  usual  way.  This 
may  not  be  for  some  time  afterward,  and  the  transaction  may 
be  forgotten  or  the  memorandum  mislaid.  It  is,  therefore,  better 
to  have  a  proper  mechanism  for  returns  into  stores,  each  trans- 
action being  thus  recorded  at  the  time  it  happens,  with  a  probable 
minimizing  of  errors.  As  stores  returns  are  much  more  frequent 
as  a  general  rule  than  returns  of  goods  purchased,  the  method  of 
red  ink  credits  can  very  well  be  used  for  the  latter,  even  when  the 
former  is  provided  for  by  special  Stores  Return  Notes  and 
corresponding  Stores  Returned  Book. 

Stores  chargeable  to  Selling  Expense.  In  most  cases  there  will 
be  a  small  proportion  of  items  issued  by  stores  each  month  to  the 


190      MANUFACTURING  COSTS  AND  ACCOUNTS 

selling  department.  A  special  column  is  provided  in  the  Stores 
Issues  Book  for  the  record  of  such  items.  The  total  of  this  column 
forms  the  authority  for  an  entry  in  the  Selling  Expense  Journal, 
and  does  not  affect  the  factory  accounts  at  all. 


CHAPTEB   VII 

PURCHASES    NOT    IMMEDIATELY    CHARGEABLE- 
BUILDINGS  AND  PLANT 

While  stores  may  be  defined  as  the  materials  with  or  on  which 
we  carry  out  the  operations  of  manufacture,  plant  may  be  defined 
as  the  devices  by  which  such  operations  are  effected.  Though 
buildings  arc  of  sufficient  importance  to  be  classified  by  themselves, 
they  are  really  a  variety  of  plant,  and  in  some  instances,  as  in 
the  case  of  ovens,  furnaces,  hearths,  etc.,  it  is  difficult  to  draw  a 
hard  and  fast  line  between  them.  In  the  general  diagram,  there- 
fore, the  general  term  "plant"  is  used  as  representative  of  a 
class  of  purchases,  wholly  different  from  stores  in  the  main, 
since  they  are  not  immediately  consumed  or  used  up,  or  changed 
in  the  course  of  their  employment,  and  hence  cannot  be  charged 
to  any  particular  order  or  use. 

In  practice,  plant  is  usually  subdivided  into  buildings,  ma- 
chinery, power  plant,  electric  equipment,  cranes  and  transporting 
appliances,  transmission  gear,  permanent  and  perishable  tools, 
factory  fixtures,  office  appliances,  and  so  forth.  Most  of  these 
items  enter  the  accounting  system  by  means  of  purchase,  though 
this  is  by  no  means  always  the  case.  Factory  fixtures  and  tools 
are  quite  as  often  made  by  the  firm  itself  as  they  are  purchased. 

There  is  also,  in  many  industries,  another  variety  of  plant, 
usually  made  or  constructed  by  the  firm  itself,  though  sometimes 
purchased  from  outside.  This  may  be  described  as  auxiliary 
equipment,  such  as  patterns,  molds,  dies,  jigs,  machine  fixtures, 
shoe  lasts,  printing  rolls,  and  in  general  all  such  articles  as  are 
of  the  nature  of  special  equipment  of  which  the  use  is  confined  to 
the  production  of  one  kind  of  article,  and  is  of  no  use  for  other 
kinds. 

From  an  accounting  viewpoint  the  peculiar  and  distinguishing 
feature  of  plant  is  that  it  is  chargeable  against  Production 
by  what  is  termed  depreciation,  that  is  by  a  regular  amount  pro- 
portionate to  the  expected  useful  life  of  the  plant  item.  Though 
this  amount  is  usually  calculated  on  a  time  basis,  as  for  instance 

191 


192     MANUFACTURING  COSTS  AND  ACCOUNTS 

in  the  case  of  a  building  costing  $20,000,  and  expected  to  last  40 
years,  the  annual  charge  against  Production  will  be  $500;  yet  such 
charges  are  sometimes  calculated  on  other  bases.  A  furnace  for 
example  may  cost  $4,000,  and  have  an  expected  output,  before 
it  has  to  be  rebuilt,  of  8,000  tons,  in  which  case  a  charge  against 
Production  can  be  based  on  the  anticipated  tonnage,  instead  of 
the  expected  years  or  months  of  life.  The  cost  of  the  furnace 
would  thus  be  charged  to  Production  at  the  rate  of  50  cts.  per  ton. 

From  these  instances  it  will  be  seen  that  a  depreciation  charge 
is  not  a  definite  or  hard  and  fast  thing  like  the  purchase  price  of 
a  pound  of  brass  rod.  Though  the  original  cost  of  the  item  of 
plant  is  always  known  with  as  much  precision  as  the  cost  of  the 
rod,  when  it  comes  to  charging  Production,  or  in  other  words 
making  an  issue  price,  there  is  a  great  difference  between  stores 
and  plant.  The  brass  rod  is  weighed,  issued,  and  used  up  there 
and  then,  and  the  issue  price  of  a  pound  is  prorated  from  its 
cost  price  per  ton.  But  when  we  buy  a  machine  for  $500,  we  do 
not  cut  bits  off  it  and  issue  them  against  specific  jobs.  We 
cannot  say  that  this  or  that  job  has  used  up  $5  worth  of  the 
original  value  of  the  machine.  We  are  really  obliged  to  make  a 
guess  at  the  amount  by  which  the  value  of  the  machine  has  been 
diminished  or  used  up  on  account  of  its  use  on  a  particular  job. 
And  though  this  guess  may  be  refined,  and  based  on  experience, 
it  is  nevertheless  true  that  all  depreciation  rates  are  very  approxi- 
mate in  their  nature,  and  liable  to  be  affected  by  causes  quite 
unforeseen  at  the  time  the  rate  was  first  estimated  and  fixed. 

For  example,  the  useful  life  of  a  machine  depends  to  a  great 
extent  on  the  manner  in  which  it  is  used,  and  on  the  practice  of 
the  shop  with  regard  to  cleaning,  caring  for  and  maintaining  its 
machines.  It  also  depends  on  the  degree  of  intensity  to  which  it 
is  worked,  whether  for  8,  16  or  24  hr.  per  day.  If  habitually 
overstrained  its  life  is  shortened,  to  say  nothing  of  possible  ac- 
cidents which  may  permanently  enfeeble  its  constitution. 

Nor  is  this  all.  Even  though  a  machine  is  used  fairly  and 
uniformly  as  contemplated  when  the  rate  of  depreciation  was 
fixed  there  is  another  influence  that  may  shorten  its  period  of 
usefulness  in  an  unexpected  way.  The  progress  of  the  technical 
art  in  which  it  is  employed  may  develop  more  efficient  machines 
for  doing  the  same  work,  so  that  it  becomes  advisable  to  scrap  it 
long  before  it  is  worn  out.  The  machine  becomes  obsolete,  and 
loss  of  value  from  this  cause  is  called  "obsolescence." 


B UILDINGS  A ND  PLANT  1 !  13 

Again,  unless  the  machine  is  of  a  very  generalized  type,  such 
as  an  engineer's  lathe,  another  type  of  misfortune  may  overtake 
it.  If  it  is  a  machine  that  can  be  used  only  for  certain  definite 
kinds  of  work  or  some  special  article,  as  for  example  many  of 
the  machines  used  in  automobile  and  bicjycle  manufacture, 
it  may  happen  that  changes  in  demand,  or  in  style,  make  the 
manufacture  of  that  special  article  no  longer  profitable.  In 
this  case,  unless  the  machine  can  be  transformed  for  another  use, 
it  is  a  dead  loss. 

All  these  remarks  apply  to  plant  and  equipment  in  general,  but 
they  apply  with  much  greater  force  to  what  has  been  termed 
auxiliary  equipment,  patterns,  jigs,  molds,  and  all  that  class 
of  articles  which  are  used  to  make  other  things  with,  and  can 
only  as  a  rule  be  used  for  making  one  specific  thing.  This 
class  of  equipment  provides  some  of  the  most  troublesome 
problems  that  the  manufacturing  accountant  has  to  deal  with, 
because  the  element  of  uncertainty  becomes  greater  in  propor- 
tion to  the  degree  of  specialization  of  the  equipment. 

In  those  industries  that  are  dependent  on  the  changes  of 
fashion,  as  for  example  in  the  manufacture  of  shoes,  wherein  the 
cost  of  lasts  will  sometimes  bear  an  appreciable  relation  to  the  cost 
of  manufacture,  and  in  the  engineering  industries  where  complex 
patterns  and  jigs  are  necessary,  necessitating  high-priced  work- 
manship and  some  of  the  most  accurate  work  that  is  known  to 
industry,  the  difference  between  profit  and  loss  may  reside  in  a 
correct  solution  of  the  charging  of  auxiliary  equipment  to  pro- 
duction on  a  proper  basis.  But  the  selection  of  a  just  basis  for 
charges  is  a  very  difficult  matter,  as  not  infrequently  the  future* 
demand  for  the  product  for  which  the  auxiliary  equipment  is 
made  cannot  be  foreseen  with  any  approach  to  accuracy.  And 
the  dilemma  is  this;  if  we  assume  too  small  a  future  demand  and 
throw  all  the  cost  of  the  auxiliary  equipment  on  this,  the  increase 
of  cost  thus  brought  about  may  handicap  the  soiling  possibilities; 
or,  on  the  other  hand,  if  we  overestimate  the  demand,  and  make  a 
lower  charge  to  production  accordingly,  it  may  happen  that  when 
demand  has  ceased,  the  auxiliary  equipment  is  not  all  paid  for  by 
being  charged  out  into  cost,  and  a  loss  is  thereby  incurred  that  is 
not  recoverable  in  any  way,  and  may  in  fact  wipe  out  a  large  frac- 
tion of  the  profits  supposed  to  have  been  made  by  the  manu- 
facture of  the  product. 

From  the  foregoing  it  will  be  understood  that  depreciation 

13 


194      MANUFACTURING  COSTS  AND  ACCOUNTS 

rates  on  buildings,  plant  and  equipment  vary  among  them- 
selves. A  building  which  lasts  50  or  70  years  and  a  pattern 
expected  to  be  used  for  a  dozen  articles  only,  will  obviously  be 
charged  to  Production  at  very  different  percentages  of  their 
original  cost.  And  between  these  limits  practical  experience  has 
worked  out  a  range  of  customary  depreciation  rates  for  most  of 
the  items  of  plant  and  equipment  used  in  modern  industries,  and 
though  it  cannot  be  said  that  different  authorities  exhibit  any  too 
close  an  agreement  on  these  rates,  still  there  is  a  considerable 
amount  of  experience  available  in  fixing  them.  Moreover,  the 
problem  is  simplified  from  the  accountant's  standpoint  by  the 
fact  that  such  rates  are  usually  applied  uniformly  to  whole  classes 
of  equipment,  on  the  principle  of  average.  In  general  the  ac- 
countant will  not  fix  these  rates,  since  the  problems  involved  are 
of  a  technical  nature,  and  his  interest  in  them  is  confined  to  ar- 
ranging the  mechanism  of  charging  them  to  Production.  Never- 
theless, when  it  comes  to  the  apportionment  of  charges  for 
auxiliary  equipment,  a  watchful  attitude  on  his  part  as  regards 
the  effect  of  whatever  rates  have  been  fixed  in  wiping  out  the 
original  cost  of  such  equipment  with  sufficient  rapidity  may  be 
very  valuable  indeed. 

Once  the  question  of  depreciation  rates  has  been  settled,  and 
the  rates  have  been  fixed,  the  accounting  of  buildings,  plant  and 
equipment  can  be  considered  a  simple  problem.  It  is  usual  to 
provide  ledger  accounts  for  these  items,  and  a  separate  account 
for  the  monthly  amounts  charged  for  depreciation,  the  latter 
being  journalized  half  yearly  or  yearly,  and  so  transferred  to 
credit  of  the  various  plant  accounts. 

The  diagram,  Fig.  41,  shows  the  general  relation  of  Plant 
accounts  to  Purchasing  on  the  one  side  and  to  Manufacturing  on 
the  other.  In  the  center  of  the  diagram  a  Plant  account  is 
shown,  which  as  in  the  similar  diagram  for  Stores,  may  be  taken 
as  representative  of  a  Control  account.  The  small  circles  below 
represent  the  Plant  Ledger  Item  Cards,  which  correspond  in 
function  to  the  Stores  Item  Ledger  Cards  previously  described. 
That  is  to  say  that  they  are  the  subdivisions  of  the  balance  at 
any  time  existing  in  the  Control  account.  The  journal  on  the 
left  side  is  the  medium  for  charging  Plant  accounts,  and  on 
the  right  the  method  of  crediting  depreciation  to  the  Plant  ac- 
counts is  also  shown. 

Items  purchased  are  charged  to  Plant  accounts  through  the 


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196      MANUFACTURING  COSTS  AND  ACCOUNTS 

special  column  in  the  Purchases  Journal  (or  Voucher  Record 
Journal)  and  are  credited  to  the  supply  firm  or  to  Accounts  Pay- 
able, as  explained  in  the  chapter  on  Purchases.  Another  jour- 
nal (not  shown)  is  a  special  one,  and  takes  the  place  of  the  Pur- 
chase Journal  in  those  cases  in  which  items  of  plant  or  equipment 
have  been  made  in  the  shops  instead  of  being  purchased  from 
outside.  Each  such  item  is  entered  and  the  total  for  the  month 
credited  to  Manufacturing  account  instead  of  to  a  supply  firm. 
The  charges  to  Plant  accounts  are  made  in  exactly  the  same  way 
as  those  from  the  Purchase  Journal.  It  may  be  regarded  as  a 
journal  dealing  with  "purchases  from  selves."  The  items  could 
in  fact,  in  a  small  plant,  be  passed  through  the  regular  Purchase 
Journal  if  a  special  column  were  provided  on  the  credit  side  so 
that  credits  to  Manufacturing  account  were  thus  separated  from 
those  arising  from  actual  purchase. 

The  other  side  of  the  diagram  requires  more  explanation.  It 
has  already  been  explained  that  the  cost  of  plant  is  not  charged 
directly  to  Manufacturing,  but  through  the  medium  of  what  is 
called  a  depreciation  rate.  As  each  class  of  plant  requires  a 
different  rate,  it  is  necessary  to  set  up  some  mechanism  whereby 
the  total  depreciation  for  each  such  class  for  a  year  can  be  cal- 
culated and  can  be  allocated  in  the  proper  amount  to  the  various 
departments  of  the  factory.  The  Depreciation  Schedule  (see 
below  for  a  detailed  description)  is  arranged  to  perform  this 
function,  and  by  its  means  entries  are  made  in  the  Burden  Journal 
of  the  proper  amount  due  to  each  department.  At  a  later  stage 
than  that  with  which  we  are  now  dealing,  these  depreciation 
figures  are  charged  to  Production  on  some  selected  basis,  and 
credited  to  Depreciation  account. 

The  credit  balance  in  this  latter  account  is,  of  course,  a  set-off 
against  the  cost  of  plant  as  it  stands  in  the  Plant  ledgers.  If 
the  value  of  plant  as  shown  by  the  Control  account  is  $50,000, 
and  the  amount  of  depreciation  credited  the  first  month  is  $500, 
then  it  is  obvious  that  our  plant  is  only  worth  $49,500.  But 
it  is  not  necessary  to  perform  the  clerical  work  of  crediting  each 
individual  Plant  Item  Card  each  month  with  the  amount  of  de- 
preciation thus  charged  to  Manufacturing.  The  Depreciation 
account  is,  therefore,  intercalated  in  between  Burden  Journal 
and  Plant  account.  It  serves  to  receive  and  store  up  credits 
on  account  of  depreciation  until  such  time  as  it  is  convenient  to 
transfer  the  items  to  the  credit  of  Plant.     This  may  be  done  yearly 


BUILDIXCS  AND  PLANT  197 

or  half  yearly  according  to  the  financial  period  of  the  firm's  ac- 
counts. When  it  is  done,  Depreciation  account  is,  of  course, 
clear,  and  the  various  Plant  Item  accounts,  as  well  as  the  Con- 
trol account,  have  diminished  balances  by  just  the  amount 
so  transferred. 

The  cycle  of  operations  regarding  plant  will  now  be  quite  clear. 
First,  we  have  a  ledger  account  or  accounts  which  are  Control 
accounts  for  the  principal  divisions  of  our  plant.  These,  for 
example,  may  be  titled,  Buildings,  Machinery,  Power  Plant, 
and  so  forth,  and  each  of  them  will  have  a  particular  section 
of  the  Plant  Item  Ledger  Cards  devoted  to  that  class  of  equip- 
ment. The  balances  on  all  the  cards  in  any  one  section  will 
agree  at  all  times  with  the  balance  in  the  Control  account  pertain- 
ing to  it.  No  charge  or  credit  must  be  made  to  any  Item  Card 
without  the  corresponding  Control  account  being  also  charged  or 
credited  at  the  same  time.  But  while  the  Item  Cards  are  charged 
with  individual  transactions  the  Control  accounts  are  charged 
only  with  monthly  totals  of  such  transactions. 

The  mechanism  of  charging  the  Plant  accounts  is  simple. 
Charges  have  two  sources,  one  arising  from  purchases  from  out- 
side firms,  the  other  arising  from  transfers  from  the  shops  (pur- 
chases from  selves). 

Credits  to  plant  accounts,  except  in  the  exceptional  case  of 
plant  being  sold,  in  w^hich  case  a  special  entry  would  be  made  in 
the  General  Journal  to  cover  the  transaction,  are  made  by  means 
of  depreciation  rates.  These  rates  are  calculated  by  means  of 
a  Depreciation  Schedule,  and  entered  on  a  Burden  Journal,  of 
which  the  use  will  be  described  later.  This  journal  credits  De- 
preciation account  each  month.  At  some  convenient  season, 
usually  the  end  of  the  firm's  financial  period,  these  credits  are 
transferred  to  the  various  Plant  accounts.  This  completes  the 
cycle. 

We  have  now  to  consider  in  more  detail  some  of  the  blanks  and 
books  by  which  these  transactions  are  carried  out.  The  central 
feature  of  the  system  is  necessarily  the  Plant  Item  Card  Ledger 
(Figs.  42  and  42A).  As  in  the  case  of  the  Stores  Item  Card,  this 
is  usually  so  arranged  as  to  afford  facilities  for  information  not 
pertaining  strictly  to  the  main  line  of  accounting,  but  of  great 
value  from  the  administrative  point  of  view.  The  form  suggested 
in  this  figure  provides  for  the  following  data: 

1.  Ledger   account,    with   columns   for   charges,    credits   and 


198     MANUFACTURING  COSTS  AND  ACCOUNTS 


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balance.  The  cost  of  the  original  purchase,  with  any  added 
items  for  freight,  installation,  etc.,  is  posted  from  Purchase 
Journal  to  the  column  headed  "Debits."  The  annual  credit  for 
depreciation  transferred  from  Depreciation  account  is  posted 
from  the  General  Journal  to  the  column  headed  "Credits."  The 
balance  column  shows  the  present  value  of  the  machine.  Should 
the  machine  be  sold  the  amount  will  be  journalized  in  the  general 
journal,  and  posted  to  the  credits  column,  thus  eliminating  all 
balance.  In  most  cases  this  will  entail  a  loss,  since  it  is  hardly  to 
be  expected  that  the  price  obtained  will  be  equal  to  the  existing 
book  value  of  the  item.  The  difference  will  be  taken  care  of  in 
the  journal  entry,  being  carried  to  Profit  and  Loss.  Thus  if  the 
book  value  of  the  item  is  $509  and  it  is  sold  for  $200,  the  journal 
entries  will  be  as  follows: 

Cr.  Machinery  account  (and  item  card) $500 

Dr.  John  Jones  (purchaser) 200 

Dr.  Profit  and  Loss  (loss  on  sale) 300 

Until  the  machine  is  sold,  however,  its  present  value  (at 
the  end  of  each  financial  period,  after  all  depreciations  have 
been  credited)  will  appear  on  the  card,  and  the  total  of  all 
such  balances  in  any  given  section  of  the  Item  Ledger  will  agree 
with  the  balance  in  the  corresponding  Control  account. 

2.  Idle  Time  Record.  This  will  be  found  immediately 
above  the  ledger  account.  It  consists  of  spaces  in  which  the 
number  of  hours  in  which  the  machine  has  been  standing  idle 
and  unused  during  a  month  is  entered. 

3.  The  face  of  the  card  is  headed  with  a  series  of  numbers, 
each  of  which  represents  a  different  class  of  equipment  and 
each  of  which  should  be  represented  in  a  separate  Control  account. 
Thus,  section  1  may  mean  buildings;  section  2,  power  plant, 
etc.  Tabs  or  signals  are  affixed  to  the  top  of  the  card,  making 
a  cross-index  by  classes  of  equipment. 

4.  The  next  space  on  the  card  is  for  the  purpose  of  registering 
data  about  the  machine:  condensed  description  of  it,  name  of 
maker,  date  bought,  and,  for  purposes  of  depreciation,  the 
estimated  years  of  useful  life,  and  the  depreciation  rate  which  it 
has  been  decided  to  apply  to  it. 

5.  The  remainder  of  the  card  is  given  up  to  a  record  of  the 
repairs  and  their  cost,  which  may  be  necessary  during  the 
life  of  the  machine.     This  record,  though  in  terms  of  cost,  is 


200      MANUFACTURING  COSTS  AND  ACCOUNTS 

only  a  memorandum  and  is  in  no  sense  a  part  of  the  accounting 
scheme.  It  merely  serves  to  record  the  frequency  and  cost  of 
repairs,  so  that  a  general  idea  of  the  behavior  of  the  machine 
may  be  gathered  by  the  technical  men  concerned.  It  is  not 
at  all  necessary  that  this  information  should  be  collected  on  the 
same  card  as  the  real  accounting  items.  In  fact,  for  reasons  of 
accessibility  in  large  plants  it  may  often  be  better  to  make  it 
into  a  separate  record.     The  principle  is  not  thereby  affected. 

The  serial  number  of  the  item  should  appear  at  the  top  right- 
hand  corner  of  the  face  of  the  card.  These  serial  numbers  are 
allotted  to  each  machine  as  installed,  and  are  usually  painted  in  a 
conspicuous  place  on  the  machine  itself.  A  system  of  number- 
ing items  of  equipment  is  of  the  greatest  possible  service  in  many 
directions  if  properly  carried  out,  but  unless  so  carried  out  may 
become  a  positive  nuisance  and  source  of  confusion.  There  are 
several  ways  in  which  the  series  of  numbers  can  be  arranged. 
The  choice  of  a  system  will  depend  on  what  we  wish  to  do,  or  in 
other  words,  in  what  way  we  wish  to  make  use  of  the  numbers. 

Their  prime  use  is  to  identify  the  machine  with  its  record 
on  the  Card  Item  Ledger,  wherein  the  original  cost,  makers, 
name  and  so  forth  can  be  traced — information  of  the  utmost 
importance  to  have  at  hand  in  case  of  destruction  of  a  shop  by 
fire.  Where  technical  data  are  posted  to  the  ledger  card  as 
suggested  above,  quick  reference  to  the  right  card  is  also  necessary. 
But  as  machines  and  equipment  generally  are  grouped  according 
to  the  necessities  of  the  shops,  and  cards  are  grouped  according 
to  the  necessities  of  the  accountant,  it  is  not  always  easy  to 
devise  a  system  of  numbering  and  arrangement  of  cards  that 
will  .meet  all  demands  on  it  without  too  much  cross-reference 
and  clerical  work  in  keeping  up  indexes. 

Generally  speaking  it  is  desirable  to  have  a  division  by  classes 
of  Plant  (corresponding  to  the  Control  accounts)  and  also  by 
location  of  machines.  It  is  frequently  desired  also  to  make 
the  symbol  number  indicate  what  kind  of  machine,  such  as 
lathe,  planer,  etc.,  is  in  question.  The  value  of  incorporating 
this  latter  information  in  the  symbol  number  is  doubtful,  and 
even  when  provided  has  but  limited  use.  The  main  use  of 
symbol  numbers  is  this:  "Given  the  number  of  a  machine,  where 
is  the  card  referring  to  it?"  A  simple  consecutive  numbering 
of  each  item  as  installed  would  meet  this  case  were  it  not  for  the 
necessity  for   grouping   the   cards  for   accounting   purposes   in 


BUILDINGS  AND  I 'LA  NT  201 

particular  ways.  For  example,  it  is  necessary  to  be  able  to 
identify  at  sight  all  the  cards  belonging  to  particular  classes  of 
equipment  and  therefore  to  particular  Control  accounts.  Next, 
we  require  to  have  a  division  of  the  cards  by  departments,  or 
in  other  words,  by  location  of  the  item,  and  this  latter  arrange- 
ment must  be  sufficiently  flexible  to  allow  of  frequent  transfers 
of  items  from  one  department  to  another  when  machinery, 
motors,  etc.,  are  moved  about  the  plant,  as  usually  happens. 

Perhaps  the  simplest  way  of  meeting  the  problem  is  by 
allotting  a  letter  to  each  class  of  equipment,  and  serially  number- 
ing each  new  item  of  that  class  as  it  is  installed.  We  shall  thus 
have  as  many  series  of  numbers  running  as  there  are  classes  of 
equipment.  A  serial  register  will  be  kept  for  each  of  these 
series,  and  a  number,  once  allotted  to  an  item,  say  a  motor  or  a 
lathe,  will  always  be  identified  with  that  item  as  long  as  it  remains 
in  the  plant.  Then,  to  identify  the  item  with  a  department,  it 
will  be  well  to  assign  numbers  to  departments,  and  add  the 
departmental  number  to  the  above  symbol.  Thus  if  electric 
equipment  is  class  E,  and  a  new  motor  is  installed  and  the  next 
vacant  number  on  the  register  is  345,  that  motor  will  henceforth 
be  known  as  E345.  If  now  it  is  located  in  department  7,  the 
symbol  will  read  E345/7.  If  later  it  is  transferred  to  depart- 
ment 8,  it  will  read  E345/8.  On  the  motor  itself  only  the 
symbol  E345  will  be  painted,  since  it  will  be  obvious  to  anyone 
repairing  it,  for  example,  that  it  is  in  department  7  or  8  as  the 
case  may  be.  Further  should  it  be  retired  from  active  ser- 
vice temporarily  and  placed  in  stores,  the  symbol  will  read 
E345/Stores  which  will  at  once  signal  that  it  is  temporarily 
out  of  use. 

The  arrangement  of  the  Item  Ledger  Cards  will  be  as  follows: 
Each  card  will  be  tabbed  with  its  class  letter,  say  E,  as  described 
above.  All  the  cards  for  one  department  will  be  grouped  to- 
gether in  serial  order  irrespective  of  their  class  letter.  Then  if 
it  is  desired  to  find  E345/7,  we  shall  turn  to  group  7  in  the  card 
ledger,  turn  up  serial  number  345,  and  if  there  are  more  than 
one  of  this  number,  reference  to  the  tabs  will  serve  to  separate 
the  one  desired  with  a  minimum  of  trouble. 

By  this  means  we  can  at  any  time  ascertain  the  total  value  of 
plant  of  any  class  in  any  department,  or  of  any  class  by  itself, 
or  of  any  department  by  itself  as  desired,  and  we  can  also 
promptly  identify  any  item  by  its  reference  number.     Further 


202      MANUFACTURING  <  OSTS  AND  ACCOUNTS 

if  the  departmental   number  is  omitted  from  the  symbol   by 

mischance,  it  is  not  a  difficult  matter  to  look  for  E345  in  one 

group  after  another,  say  three,  four,  or  even  ten  groups,  till  it 

ind.     This  is  a  much  easier  matter  than  to  identify  a  machine 

of  which  the  number  has  been  changed  without  record  of  the 

change  being  made,  as  is  not  infrequently  the  case  where  a  system 

of   numbering   is   adopted   requiring   fresh   numbering  at   each 

transfer  from  one  department  to  another.     By  this  plan,  also, 

xes   for  the  purpose  of  cross-classification  are  not 

■  .    although,    if    desired,    lists    of    equipment    by    sub- 

compiled.     Thus  machinery  can  be  subdivided 

laners.  shapers,  etc     As  the  symbol  number  of  an 

is  never  changed,  this  entry  has  to  be  made  only  once, 

namely,  when  the  item  is  installed. 

The  <  Jard  Item  Ledger  having  been  set  up,  and  all  the  different 
-  of  plant  and  equipment  posted  from  the  journals,  it  will 
id.  lit  that  if  all  the  balances  on  the  cards  belonging  to  class 
segregated  on  an  adding  machine,  they  should  agree  with 
the  total   balance  in  Control  account  for  electric  equipment. 
.it  may  be  considered  advisable  to  subdivide  the 
rol  account  tie] >art mentally,  so  that  the  total  of  class  E  for 
each  department  is  shown  separately.     This  is  easily  done  by 
iding  a  ledger  page  with  several  columns,  each  such  column 
ting  a   department.     If  this   arrangement  is  adopted, 
then  the  balance  in  each  such  subdivision  should  agree  with  the 
E     irds  by  their  departmental  classifications.     The  arrange- 
ment is  obviously  convenient   for  many  purposes,  in  localizing 
error-,  for  example,  bul  it  has  the  disadvantage  that  every  trans- 
•  an  item  of  equipment  from  one  department  to  another  will 
require  adjustment   in  the  control  account,  by  transfer  of  the 
value  of  the  item  from  one  column  to  another,  with  a  consequent 
rectificat  ion  of  balani  i 

The   principal   object    for  which   classifications  of  plant  and 

equipment  are  required  from  the  accounting  viewpoint  is  for  the 

eel   allocation  of  depreciation  to  departments.     To  do  this 

imething  more  than  a  ledger  account  is  required,  and 

ell  to  keep  the  latter  as  simple  as  possible 

without  departmental  columns.     The  mechanism  by  which  the 

plant  i-  plotti  to  exhibit  its  relation  to  departments 

on  the.  on.-  hand  and  to  depreciation  rat.-  on  the  other  is  termed  a 

•ion  Schedule,  Fig.  13  (see  also  diagram,  Fig.  41). 


MILDIXCS  AND  PLANT 


203 


One  sheet  of  such  a  schedule  is  devoted  to  one  class  of  equip 
ment,  say  electric  equipment.  The 
various  items  of  equipment  are  listed 
in  serial  order  on  the  sheet,  together 
with  their  book  value,  which  is  entered 
in  the  column  headed  "Total"  under 
the  subheading  "Cost."  Against  each 
item  is  placed  its  depreciation  rate, 
and  the  yearly  amount  of  the  depre- 
ciation calculated  and  entered  in  the 
next  column.  The  remaining  col- 
umns, headed  "Department  1,"  etc., 
are  for  the  purpose  of  distributing 
the  depreciation  to  the  departments 
in  which  the  items  are  located.  If, 
for  example,  a  certain  item  is  valued 
at  $500  with  a  depreciation  rate  of 
2%  Per  cent,  this  will  mean  a  yearly 
charge  to  manufacturing  of  $12.50, 
which  is  entered  accordingly  in  the 
third  column  under  "Total."  Now 
if  this  item  is  located  in  department 
2,  the  following  entries  are  made  in 
the  department  2  columns:  First, 
the  book  value  is  entered;  next,  the 
yearly  depreciation  charge;  and  then, 
one-twelfth  of  this  amount  (or  one- 
thirteenth  where  the  plan  of  4-week 
months  is  in  use).  When  all  the 
items  have  been  thus  distributed  to 
departments  the  following  agreements 
are  made:  (1)  The  totals  of  all  de- 
partmental columns  headed  "Cost" 
should  equal  the  total  of  "Cost"  in 
the  total  column.  By  this  means  we 
obtain  a  summary  of  the  cost  of  equip- 
ment for  each  department.  (2)  The 
totals  of  all  departmental  columns 
headed  "Yearly  Depreciation"  should 
equal  the  same  item  in  total  column. 
This  shows  the  annual  charge  for  de- 


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204      MANUFACTURING  (  OSTS  AND  ACCOUNTS 

preciation  to  bo  borne  by  each  department.  (3)  The  totals  of 
all  department  columns  headed  "Monthly  Depreciation"  should 
equal,  when  multiplied  by  12  or  13  as  the  case  may  be,  the 
I  of  yearly  depreciation  in  the  total  columns. 
I  practice,  a  shorter  method  than  the  above  may  be  em- 
ployed,  if  no  considerable  movements  of  equipment  between 
departments  is  likely  to  take  place  during  the  financial  year. 
The  ledger  cards  having  been  departmentalized  as  explained 
above,  each  class  of  equipment  may  be  taken  separately  (picked 
out  by  the  tabs),  divided  into  as  many  groups  as  there  are  different 
rates  of  depreciation  concerned,  and  each  set  of  cards  bearing  the 
same  depreciation  rate  aggregated  and  entered  as  one  item  on  the 
,-iai  ion  Schedule.  Thus,  if  class  E,  totalling  $50,000  is 
really  made  up  of  820,000  rated  at  3  per  cent.,  $15,000  rated  at 
4  per  cent,  and  si 5.000  rated  at  5  per  cent.,  we  may  enter  these 
items  in  three  lines  on  the  schedule  thus: 

Cost  Rate  Vrly.  Dep. 

-      dry  items $20,000  3  per  cent.  $600 

Ditto       15,000  4  per  cent.  600 

Ditto     15,000  5  per  cent.  750 

Total  for  class  E....  $50,000  $1,950 

Next,  by  sorting  our  cards  into  sub-groups  according  to 
departmental  location,  we  can  ascertain  how  much  of  the  equip- 
ment belonging  to  the  3  per  cent,  group  is  located  in  department 
1.  how  much  in  department  2  and  so  forth.  These  amounts,  and 
their  yearly  depreciation  are  then  entered  in  the  departmental 
column-  a-  before. 

The  short  method  has  exactly  the  same  result  as  the  longer  one, 
and  the  sheets  are  balanced  in  the  same  way,  but,  of  course,  the 
advantage  of  having  a  tabular  statement  or  inventory  of  the  plant 
ami  equipment  of  each  class  i-  sacrificed.  Which  method  should 
lected  will  depend  on  circumstances.  In  some  methods  of 
costinj  Method    C    in    Chap.    XX)    a   somewhat   detailed 

analysis  of  equipment  i-  necessary,  ami  in  that  case  it  can  be 
made  on  the  Depreciation  Schedule  quite  conveniently.  In 
other  methode  a-  long  :i.  .,  correct  summary  by  departments  is 
made  that  ifi  all  that  i-  necessary  for  accounting  purposes. 

Wh'-n  all  the  schedules  have  been  made  out  and  a  recapitu- 
lation taken,  it  i-  evident  that  we  shall  be  in  possession  of  the 
yearly  and  also  the  monthly  amounts  which  are  to  be  charged 
against    manufacturing  in  each  department.     With  the  way  in 


BUILDINGS  AND  PLANT  205 

which  these  figures  are  used  we  have  nothing  to  do  at  present, 
except  to  note  that  each  month  certain  Burden  Journals  will  be 
the  sources  whence  a  credit  for  the  amounts  indicated  by  the 
schedule  will  be  made  to  Plant  and  Equipment.  This  credit  is 
not,  however,  in  practice  made  monthly  to  the  Plant  accounts. 
To  do  so  would  involve  too  much  labor.  On  reference  to  the 
diagram  (Fig.  41)  it  will  be  seen  that  the  credit  received  from  the 
manufacturing  department  is  made  to  a  Depreciation  account, 
month  by  month,  and  this  credit  must  be  agreed  with  the  amount 
as  indicated  by  the  Depreciation  Schedule.  At  the  end  of  the 
financial  period,  whether  yearly  or  half  yearly,  the  amount  stand- 
ing to  the  credit  of  Depreciation  account  is  transferred  to  the 
credit  of  sundry  Plant  Control  accounts  and  to  the  individual 
Item  Cards. 

The  way  in  which  this  operation  is  effected  is  by  a  virtual 
reversal  of  the  process  of  compiling  the  Depreciation  Schedule. 
As  each  monthly  credit  from  manufacturing  was  agreed  with  the 
monthly  total  of  the  schedule,  it  follows  that  the  yearly  total 
of  credits  in  Depreciation  account  will  agree  with  the  total  of  the 
schedule.  If,  then,  the  schedule  has  been  made  up  on  the 
itemized  plan,  each  card  can  be  individually  credited  by  its  aid. 
If  on  the  group  total  plan,  then  the  Item  Cards  must  be  sorted  by 
classes  and  departments  and  depreciation  rates,  and  individual 
credits  made  on  each  by  aid  of  a  calculating  machine,  the  total 
of  each  sub-group  being  agreed  with  the  group  total  on  the 
schedule  before  proceeding  to  the  next  group.  This  process, 
though  intricate  to  describe,  is  really  very  simple  and  rapid  if 
properly  carried  out.  When  it  is  done,  and  the  corresponding 
credits  made  to  the  Control  accounts,  the  new  balances  on  the 
cards  will  equal  the  old  balances  less  the  amount  transferred  from 
Depreciation  account — in  other  words,  the  cards  and  Control 
accounts  will  now  show  the  new  and  depreciated  value  of  the 
plant  after  the  year's  operations  have  been  completed.  This 
new  value  will  be  the  basis  of  preparation  of  a  Depreciation 
Schedule  for  the  following  year. 

The  whole  of  the  principal  operations  by  which  plant  items 
are  recorded,  and  by  which  they  are  credited  with  depreciation 
having  now  been  exhibited,  it  only  remains  to  consider  how  far 
unexpected  happenings  may  affect  the  charging  of  depreciation. 
Rearrangements  of  machinery  do  not,  of  course,  affect  the  depart- 
mental allocation  of  depreciation  unless  plant  items  are  trans- 


206      MANUFACTURING  COSTS  AND  ACCOUNTS 

1  from  one  department  to  another.  The  three  occasions 
on  which  the  depreciation  schedule  is  subject  to  serious  disturb- 
ance  are:  (1)  Transfers  from  one  department  to  another;  (2) 
new  items  purchased  or  made  by  selves;  (3)  items  condemned 
and  withdrawn  from  active  service.  Theoretically  any  one  of 
these  changes  should  be  at  once  taken  into  account,  but  in 
such  a  continual  upset  of  the  schedule  is  not  necessary. 
Small  changes  need  not  be  taken  into  consideration  until  the  end 
of  the  financial  period,  unless  they  happen  to  embrace  items  of 
equipment  of  which  the  depreciation  rate  is  very  high,  say,  7}4 
1  per  cent.  Of  course,  if  rearrangements  have  been  made  on 
Qsiderable  scale,  or  new  plant  has  been  introduced  so  as  to 
modify  manufacturing  processes,  then  immediate;  notice  should 
ken  of  it.  In  such  rases  the  best  procedure  is  to  close  out  the 
account  of  the  departments  affected  by  transferring  the  deprecia- 
tion already  accrued,  and  making  a  fresh  schedule  in  which  the 
new  arrangements  are  reflected.  But  the  mere  purchase  of  one 
or  two  new  machines  of  an  ordinary  kind,  or  the  simple  exchange 
of  machines  between  departments  may  be  ignored  until  the  end 
of  the  period,  or  at  any  rate  until  some  future  time  when  it 
becomes  convenient  to  transfer  accrued  depreciation  to  the  item 
and  control  account-  concerned. 

Dej  ■,    chargeable   to   the   administrative   and   selling 

departments.     A   certain   proportion  of  the  total  depreciation 
will  naturally  be  chargeable  to  the  selling  department  on  account 

ce  buildings,  equipment,  warehouses,  tools,  etc.  used  by  that 
department.     A    special    column  is,  therefore,  provided    in   the 

ciaiion  Schedule  to  lake  care  of  such  amounts,  and  the 
total  of  thifl  column  is  made  the  authority  for  an  entry  in  the 
Selling  Expense  Journal,  whereby  Selling  Expense  is  charged  and 

iciation  account  credited,  just  as  Factory  Burden  is  charged 
and  Depreciation  credited  as  shown  above.  This  charge  to 
Selling  Expense  need  not  detain  us  further.  It  does  not  come 
into  the  factory  accounts  proper,  but  is  handled  as  described  in 
Ch.    XI,   bar!    |. 

Depreciation  on  buildings  and  equipment  (office  furniture  and 
machinery  I   by  the  higher   officials,  and  the  general 

office  -usually    falling    under    the    heading    of    administrative 
expense     will  be  prorated  on  the  schedule  between  selling  and 
rtmenl  on  Bome  approved  basis  contingent  on  the 
particular  circumstan 


CHAPTER  VIII 
RENTS,  TAXES,  INSURANCE,  ETC. 

So  far  we  have  been  considering  the  purchase  and  disposal 
of  actual  tangible  articles,  stores,  buildings,  machinery  and 
equipment  which  can  be  seen  and  handled,  weighed  and  counted, 
or  otherwise  identified  at  any  moment.  We  have  now  to  consider 
a  new  class  of  purchase,  namely,  purchase  of  service. 

Service  may  be  purchased  in  various  forms.  Thus  the  salary 
of  the  president  is  a  payment  for  service,  so  is  the  wage  of  a 
laborer.  A  lawyer's  bill  is  also  a  claim  for  payment  for  service, 
an  auditor's  fee  is  a  charge  for  service,  even  though  in  these  two 
last  cases  the  payments  are  made  to  persons  not  enrolled  on  the 
books  of  the  organization.  Generally  speaking  any  payment 
that  is  made  for  something  that  cannot  be  touched  or  handled  is 
for  the  most  part  a  payment  for  service  of  some  kind.  The 
particular  kinds  of  service  to  be  considered  in  this  chapter  are 
rents,  taxes  and  insurance. 

While  most  kinds  of  services  are  not  paid  for  until  rendered, 
it  is  not  infrequently  the  case  that  some  or  all  of  the  services 
just  mentioned  are  paid  for  in  advance.  In  other  cases,  as  for 
example,  employers'  liability,  the  main  part  of  the  service  may  be 
paid  for  in  advance,  subject  to  an  adjustment  at  the  end  of  the 
period  covered,  which  adjustment  may  either  be  of  the  nature  of 
an  increase  in  the  charge  or  a  reduction.  It  will  be  seen,  there- 
fore, that  this  class  of  purchases  presents  somewhat  different 
problems  from  those  previously  discussed,  and  requires  somewhat 
different  arrangements  to  control  it. 

On  the  general  diagram  only  one  typical  account  is  shown  as 
representative  of  the  whole  class.  But  in  practice,  rent,  taxes, 
water  rate,  and  the  different  classes  of  insurance  may  have 
separate  ledger  accounts.  This  is  merely  a  matter  of  convenience 
and  involves  no  principle. 

Two  principal  considerations  exist  in  relation  to  this  class  of 
purchases.  First  some  mechanism  must  be  set  up  to  "hold  up" 
or  more  properly  speaking  hold  "in  suspense"  such  payments  as 
have  been  made,  but  for  which  the  service  has  not  yet  been 

207 


MANUFAi  TURING  <  QSTS  AND  ACCOUNTS 

rendered,  and  secondly  for  charging  to  Manufacturing  month 

lonth,  the  proper  amounts,  allocated  by  departments,  that 

1  as  having  accrued  within  the  month.     This 

as  that  while  a  regular  monthly  amount  is  to  be  charged  to 

manufacturing  departments,  the  actual   payment,  or  accepted 

liability,  may  be  entered  in  the  ledger  at  any  time  during  the 

Thus  we  may  pay  rent  every  3  months  in  advance,  or 

once  a  year  in  advance,  or  we  may  receive  a  bill  for 

and  enter  it  in  Purchase  Journal  without  paying  it,  but 

whatever    procedure    these    transactions    follow,    the    regular 

monthly  charge  for  the  services  covered  by  them  must  be  made  to 

Manufacturing  and  allocated  to  departments  quite  irrespective 

of  either  billing  or  payment. 

The  allocation  of  such  charges  to  departments  necessarily 
implies  a  basis  for  calculating  such  charge.  Hitherto  in  the 
pure!  have  considered,  the  physical  existence  of  the  item 

a  sufficient  guide  to  its  relation  to  the  accounts.  But  we 
are  now  dealing  with  intangible  values,  and  it  is,  therefore,  neces- 
sary to  set  up  some  arbitrary  basis  on  which  they  may  be  dis- 
tributed.  No  single  basis  will  commonly  suffice  for  all  this 
of  charges.  But,  on  the  other  hand,  the  selection  of  a 
suitable  basis  and  the  calculations  involved  are  of  a  simple  char- 
r  so  that  substantial  accuracy  in  their  allocation  to  depart- 
ments can  be  attained  without  too  much  labor. 

In  the  case  of  rent  much  will  depend  on  what  is  actually  paid 

for  under  this  head.     If,  for  example,  we  are  leasing  a  piece  of 

land,  then  the  area  occupied  by  the  various  departments  will 

be  a  convenient  basis.     On  the  other  hand,  if  we  are  leasing  a 

complete  factory,  buildings  and  all,  then  consideration  will  have 

given  not  only  to  the  area  of  land  occupied,  but  also  to  the 

:    the  buildings  used  by  each  department.     We  shall 

in  this  latter  case  to  calculate  true  rent,  compounded  of  a 

charge  for  both  land  and  buildings,  just  as  if,  being  owners,  we 

wished  to  it  each  of  the  buildings  to  separate  tenants. 

There  Le  also  the  further  complication,  common  in  many 
countries,  in  which  a  lease  has  been  purchased.  That  is  to 
i  large  sum  has  been  paid  down  for  possession  of  the  premises 
or  the  land,  subjecl  to  a  further  annual  payment  of  rent  until 
the  end  of  the  term  for  which  the  lease  has  been  granted.  In 
this  case  provision  must  be  made  for  amortization  of  the  lease, 
the  Bum  bo  paid  down  must  be  treated  on  the  lines 


RENTS,  TAXES,  INSURANCE,  ETC.  209 

of  depreciation  of  a  machine,  and  so  much  charged  off  each 
year  so  that  when  the  lease  expires  its  entire  cost  has  been 
reduced  to  nothing.  The  real  meaning  of  a  transaction  like 
this  is  that  instead  of  paying  a  high  rent  each  year  for  say  50 
years,  a  considerable  sum  is  paid  over  on  taking  possession, 
and  then  a  small  rent  paid  every  year  instead  of  a  high  rent. 

The  precise  way  in  which  the  basis  will  be  arranged  will 
depend,  therefore,  on  the  nature  of  the  payment.  In  any 
case,  the  aim  will  be  to  so  allocate  the  total  rent  charge  among 
departments  that  each  bears  a  fair  proportion  of  the  total. 
Taxes  will  be  allocated  in  the  same  way. 

Fire  insurance  is  sometimes  distributable  on  more  than 
one  basis.  There  may  be  a  separate  rate  of  insurance  for  build- 
ings and  for  equipment  and  stock.  In  this  case,  building  in- 
surance will  be  prorated  on  a  basis  of  building  value  in  each 
department,  while  the  other  variety  will  be  distributed  on  a 
basis  of  values  contained  in  the  buildings. 

Employers'  liability  insurance  will  generally  be  allocated  to 
departments  on  a  basis  of  the  number  of  employees  or  on  the 
average  pay-roll.  In  a  few  cases,  a  department  may  bear  a 
higher  rate,  owing  to  specially  hazardous  employment.  In 
this  case,  of  course,  the  premiums  paid  will  be  segregated  and 
applied  to  that  department  alone,  such  department  being  omitted 
from  the  general  prorating  of  the  remainder  of  the  insurance 
charge. 

The  diagram,  Fig.  44,  shows  the  general  scheme  of  treatment 
of  this  class  of  purchase.  The  ledger  accounts  in  the  center  of 
the  diagram  are  merely  representative  of  the  class.  There 
may  be  several  such  accounts  dealing  with  separate  but  similar 
items  of  expense.  In  each  case  the  account  is  charged  from 
Purchase  or  Voucher  Journal  (or  in  cases  where  cash  is  paid  in 
advance,  from  Cash  Journal)  the  landlord's  or  the  insurance 
company's  account  (or  cash)  being  credited.  The  crediting 
of  the  ledger  accounts  is  effected  in  a  very  similar  manner  to  the 
crediting  of  Plant  Ledger  accounts,  namely,  by  the  aid  of  a 
Distribution  Schedule  which  is  used  to  assemble  the  items  and 
indicate  their  distribution  to  departments  on  a  yearly  basis. 
Then  one-twelfth  or  one-thirteenth  of  the  amount  chargeable 
to  each  department  is  entered  on  the  Manufacturing  Burden 
Journal  and  thereby  charged  to  production  and  credited  to  the 
Rents,  etc.,  Ledger  accounts  concerned. 

14 


210      MANUFACTURING  COSTS  AND  ACCOUNTS 

\<  the  credits  to  the  ledger  accounts  are  made  each  month  on 
the  principle  of  dividing  the  annual  charge  into  monthly  amounts, 
and  as,  on  the  other  hand,  the  charges  to  these  accounts  may  be 


made  in  one  or  more  sums  ;.i  any  period  of  the  year,  and  may 
be  in  the  nature  either  of  ordinary  purchases,  or  of  payments  in 
advance,  it  will  I.,   evident  thai  the  balances  in  these  accounts 


RENTS,  TAXES,  INSURANCE,  ETC  211 

are  of  a  wholly  different  significance  to  those  already  considered 
in  the  case  of  stores  or  plant.  The  latter  balances  are  always 
in  the  nature  of  values  of  tangible  property  remaining  on  hand. 
They  are  always  on  the  debit  side,  since  it  is  impossible  to  credit 
an  account  of  this  kind  with  more  than  it  contains.  We  either 
have  stores  or  we  do  not  have  them.  In  the  former  case  the 
ledger  will  have  a  balance  to  its  debit,  in  the  latter  case  it  will 
have  no  balance  at  all. 

In  the  class  of  accounts  we  are  now  considering  balances 
may  occur  on  either  side  of  a  ledger  account  at  various  times, 
and  it  is  advisable  to  fully  understand  the  significance  of  this 
phenomenon.  If,  for  example,  we  take  the  case  of  rent  payable 
every  3  months,  but  not  in  advance.  Then  at  the  end  of  the 
first  month,  the  Rents  account  will  receive  a  credit  from  Manu- 
facturing for  the  monthly  amount  calculated  on  the  Rents 
Schedule  and  charged  through  Burden  Journal  as  explained 
above.  There  will  be  no  corresponding  debit  from  any  source, 
so  that  Rents  account  will  contain  a  credit  balance.  The  same 
thing  will  happen  the  next  month,  only  the  balance  will,  of 
course,  now  be  larger.  The  third  month,  however,  while  a 
new  credit  is  received  from  Manufacturing,  a  debit  is  also  re- 
ceived through  Cash  or  Purchases  Journal  representing  the  bill 
for  the  whole  quarter's  rent.  This  will  equal  the  three  credits 
received  from  Manufacturing,  so  that  at  the  end  of  this  third 
month,  there  will  be  no  balance  at  all  in  the  Rents  Ledger 
account. 

Now  if  the  rent  was  payable  in  advance,  exactly  the  reverse 
behavior  of  balances  would  be  observable.  The  first  month  there 
would  be  a  large  balance  on  the  debit  side,  the  second  month 
this  would  be  smaller,  and  at  the  end  of  the  third  month  there 
would  be  no  balance  at  all.  How  then  are  we  to  regard  these 
balances  in  either  case? 

Technically  speaking,  the  first  case  is  an  example  of  a  Reserve 
account  and  the  second  of  a  Suspense  account.  The  first  balance 
is  a  reserve  against  a  future  known  liability,  and  the  second  is 
an  amount  already  paid  out  and  considered  to  be  held  in  sus- 
pense against  a  future  known  call  on  the  service  it  represents. 
This  explanation,  however,  may  not  be  very  clear  to  the  student 
not  familiar  with  accounting  terminology,  and  it  maybe  desirable, 
therefore,  to  examine  the  matter  more  closely. 

To   take   the   second    case   first — our   proceedings   are   very 


212      MANUFACTURING  COSTS  AND  ACCOUNTS 

similar   to  those  described  in   relation  to  the  charging  out  of 
3.     To   begin  with  there  is  a  debit  balance  in  the  ledger 
account,  representing  rent  paid,  just  as  there  might  be  a  balance 
in    a    particular    stores    account    representing   brass    purchased. 
And  in  both  cases  we  credit  the  account  with  the  amount  con- 
sumed i nou ili  by  month.     In  the  case  of  the  brass  by  actual 
weight  and  handling.     In  the  case  of  the  rent  by  calculation  of 
what  1  month's  rent,  will  amount  to.     In  either  case  what  is 
hit    in   the   account    will   be   a   debit   balance   representing  the 
amount  unconsumed.     In  either  case  what  is  left  in  the  account 
will  be  an  asset.     There  will  be  actual  property  in  brass,  and 
actual  property  in  a  right  to  enjoy  service.     In  the  one  case 
we  have  unexpended  material,  in  the  other  unexpended  service. 
There  is  no  difference  in  point  of  value  between  the  two  classes  of 
except  that  one  is  salable  supposing  the  plant  to  go  out  of 
business  and  the  other  is  not.     As  long  as  the  plant  is  a  going 
m,  both  are  equally  valuable. 
Nevertheless,  there  is  an  obvious  risk  involved  in  paying  for 
qo1  yet  rendered,  and,  therefore,  such  payments  though 
ssarily  considered  as  assets,  are  viewed  by  the  accountant 
in  a  special  way.     The  balances  are  considered  as  being  as  it  were, 
p,  and  not  available  except  at  a  future  date.     Such  accounts, 
•  fore,  as  contain  balances  of  this  kind,  are  termed  "Sus- 
pense" accounts. 

We  may  now  consider  the  firstof  the  two  cases.     Here  we  have 
no  balance  in  the  account  to  begin  with.     On  the  other  hand,  we 
begin  to  make  credits  to  it,  without  having  anything  to  draw  on. 
evidenl  that  some  kind  of  fictitious  transaction  is  implied 
totally  unlike  anything  we  have  met  hitherto.     In 
the  c  -mil  ;i  transaction  would  be  meaningless.     We 

could  not  credil  a  brass  account  for  brass  that  had  no  existence. 
Similarly  we  could  not  credit  depreciation  to  a  plant  account 
that  was  a  blank  Bheet  of  paper.  What  is  it  then  that  we  do  when 
we  credil  a  blank  Ledger  page  with  a  monthly  amount  represent- 
ing rent  ? 

What  we  are  doing  is  to  provide  against  the  future.  We  cannot 
use  bra--  without  having  brass,  we  cannot  depreciate  a  machine 
without  having  a  machine,  but  we  can  enjoy  service  without 
paying  for  it.  If  we  know  the  value  of  the  service  we  are  enjoy- 
ing and  '-.in  put  a  puce  on  ii,  then  although  it  has  not  been 
paid  for  actually,  we  can  enter  tins  amount  month  by  month,  on 


RENTS,  TAXES,  INSURANCE,  ETC.  213 

a  blank  ledger  page,  so  that  when  the  time  comes  to  pay  for  the 
period  that  has  expired,  the  amount  involved  will  have  already 
been  charged  out  against  Manufacturing,  just  as  though  payment 
had  been  made  month  by  month.  Technically  this  is  called 
setting  up  a  "reserve"  against  a  future  known  liability. 

Such  a  balance  is  not,  of  course,  an  asset.  It  does  not  represent 
anything  of  the  nature  of  property.  In  the  other  class  of  balance 
discussed  above,  what  was  represented  was  an  actual  purchase — 
a  purchase  in  advance  of  immediate  needs,  but  still  an  acquisition. 
In  the  present  case  the  figures  entered  on  the  credit  side  of  the 
ledger  page  are  merely  intelligent  anticipations  of  a  purchase 
that  will  presently  be  made,  the  purchase  in  question  being  of 
such  a  nature  that  it  can  be  enjoyed  before  any  charge  for  it 
appears  in  the  accounts. 

It  is  quite  true  that  from  one  aspect,  the  purchase  of  service 
is  already  completed  when  a  contract  for  it  is  made.  But  while 
this  is  true  from  an  administrative  viewpoint,  from  an  account- 
ing viewpoint  everything  begins  with  the  receipt,  acceptance 
and  entry  of  the  invoice  or  bill  on  the  journal.  No  charge  to  any 
account  can  be  made  until  this  stage  is  reached.  Consequently 
we  have  to  regard  the  transaction  now  under  discussion  as  one  in 
which  the  enjoyment  of  service  takes  place  in  advance  of  pay- 
ment or  accepted  liability  for  it.  This  being  the  case,  our  present 
transaction  signifies  that  we  have  charged  to  Manufacturing 
on  the  one  hand,  and  credited  to  future  liability  on  the  other  a 
calculated  amount,  which  amount  will  presently  be  set  against 
an  actual  payment  on  the  liability  in  such  a  way  that  no  balance 
will  be  left.  To  set  up  a  credit  balance  in  this  way  is  called  mak- 
ing a  "reserve,"  and  as  it  is  obvious  that  in  essence  it  represents 
a  payment  that  will  ultimately  have  to  be  made  out  of  cash,  it  is 
not  an  asset,  but  a  liability.  When  by  payment  of  the  accrued 
amount  the  balance  is  wiped  out,  cash  is  correspondingly  depleted. 

Services  then,  which  are  paid  for  in  advance,  and  charged  out 
to  Manufacturing  by  monthly  installments,  give  rise  to  ledger 
balances  which  are  in  the  nature  of  assets,  and  are  termed  sus- 
pense balances.  Services  paid  for  at  intervals  after  they  have 
been  enjoyed  and  credited  at  monthly  intervals  by  Manufacturing 
give  rise  to  ledger  balances  which  are  in  the  nature  of  liabilities 
and  are  termed  reserve  balances. 

The  Distribution  Schedule  (Fig.  45)  by  which  rents,  taxes, 
water  rents,  insurance  and  so  forth  are  charged  to  manufacturing 


214       MANUFACTURING  COSTS  AXJ)  ACCOUNTS 


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RENTS,  TAXES,  INSURANCE,  ETC.  215 

departments  provides  columns  for  the  total  amount  to  be  dis- 
tributed annually,  and  also  columns  for  each  department. 
In  each  case  the  basis  of  distribution  is  entered,  and  the  amount 
prorated  over  the  departments  according  to  the  share  of  the  basic 
figures  shown  against  each.  Thus  if  rent  is  payable  on  land  area, 
the  total  basis  may  be  100,000  sq.  yd.,  of  which  department  1 
will  occupy  30,000;  department  2,  7,000;  department  3,  16,000 
and  so  on.  The  annual  charge  against  each  department  is  then 
entered  in  the  columns  provided,  and  one-twelfth  or  one-thirteenth 
of  this  amount  placed  in  the  "monthly  amount"  columns.  Ver- 
tical addition  of  these  latter  columns  shows  the  amount  charge- 
able against  each  department  each  month.  The  Distribution 
Schedule  is  not  a  journal,  but  merely  serves  to  tabulate  and 
calculate  the  monthly  charges  which  are  then  entered  on  the 
Manufacturing  Burden  Journal  of  which  we  shall  speak  later. 
From  this  journal  credits  are  made  to  the  Rents,  etc.,  Ledger  ac- 
counts and  charges  to  Production  account. 

Rents,  taxes,  etc.,  chargeable  to  selling  department.  As  in 
the  case  of  depreciation,  a  certain  proportion  of  rents,  etc.  is 
chargeable  to  the  selling  department.  The  amount  so  chargeable 
is  entered  on  the  special  column  provided  in  the  Rents  Schedule, 
and  forms  the  authority  for  a  journal  entry  crediting  the  various 
Rents,  etc.  accounts  and  charging  Selling  Expense.  Such  items 
are  thus  separated  from  the  factory  accounts  proper,  and  are 
handled  as  indicated  in  Chap.  XI,  Part.  I. 


CHAPTER  IX 
TIME  AND  PAY 

in  the  last  chapter  we  considered  the  accounting  of  purchased 
service-  rendered  by  firms  or  persons  outside  the  plant.  We  have 
now  to  consider  services  rendered  by  employees  of  the  plant, 
including  both  salaried  officers  and  wage-earners.  The  subject 
of  time  and  pay,  as  in  the  case  of  all  other  purchases,  falls  into 
two  divisions,  corresponding  to  the  debit  and  credit  side  of  the 
ledger  accounts,  viz.,  Wages  account  and  Salaries  account. 
First  we  have  to  consider  the  source  and  mechanism  of  entries 
to  the  i lei  iii  of  the  account,  and  then  the  way  in  which  credits  are 
made,  and  what  corresponding  charges  to  other  accounts  are 
ssary.  In  other  words  we  have  to  ascertain  the  amount 
payable  to  each  individual,  and  also  the  nature  of  the  service  he 
has  rendered  for  the  payment,  and  to  what  account  such  service 
i-  chargeable. 

The  subjeel  of  time  and  pay  is  complicated  by  the  number 
ofdifferenl  bases  on  which  earnings  are  computed.  First,  we  have 
simple  time,  as  in  the  case  of  salaried  men,  or  day  wage-earners. 
Secondly,  we  have  simple  piecework,  in  which  so  much  is  paid 
for  each  piece  completed,  quite  independently  of  the  time  taken. 
Thirdly,  we  have  the  various  bonus  and  premium  systems,  based 
for  the  mosl  pari  on  day  wages,  but  with  additional  payments 
proportionate  to  the  saving  of  time  from  a  standard  allowance. 
Fourthly,  any  or  all  of  these  systems  may  be  used,  and  in  addi- 
tion extra  bonuses  or  rewards  may  be  earned  for  departmental 
efficiency;  and  finally,  extra  payments  may  be  made  on  some 
profit-sharing  basis,  dependent  on  the  result  of  the  business 
during  a  financial  period. 

The  mechanism  for  the  computation  of  the  amount  payable  to 

each  employee,  also,  i-    sometimes  clear  and  distinct  from  the 

mechanism  for  computing  the  allocation  or  charging  of  earnings 

'  accounts,  bul  on  the  other  hand  the  two  mechan- 

are  frequently  combined.     And   the  method  of  charging 

earnings  Is  intimately  connected  with  the  problem  of 

216 


TIME  AND  PAY  217 

orders,  and  these  again  depend  on  the  type  of  cost  system  that  is 
in  use. 

In  this  chapter  we  shall  confine  our  attention  as  far  as  possible 
to  operations  connected  with  the  debit  side  of  the  Wages  and 
Salaries  account,  leaving  till  later  the  operations  concerned  with 
crediting  such  account  and  the  corresponding  charging  to  Manu- 
facturing. This  is  in  conformity  with  the  manner  in  which  other 
classes  of  purchase  have  been  treated  in  previous  chapters. 

The  principal  document  in  which  particulars  of  the  amounts 
to  be  paid  out  are  entered  is  termed  the  pay-roll.  This  bears  the 
same  relation  to  purchases  of  service  as  the  bill  or  invoice  does  to 
purchases  of  stores,  plant  or  exterior  service.  It  is  the  prime 
authority  for  payment,  and  its  correct  compilation  is,  therefore, 
a  matter  of  great  importance.  The  pay-roll  is  commonly 
divided  into  two  separate  books,  one  dealing  with  the  wage- 
earners  and  minor  officials,  the  other  dealing  with  the  higher 
officials.  This  latter  is  usually  called  the  Salaries  Book.  The 
distinction  is  only  a  matter  of  convenience.  From  the  accounting 
viewpoint  the  two  books  are  on  exactly  the  same  footing,  and  in 
small  plants  the  pay-roll  itself  sometimes  contains  both  sets  of 
payments. 

The  pay-roll  is  not  a  book  of  original  record  in  many  cases, 
though  in  small  plants  it  sometimes  is.  The  original  record  is  the 
"Gate"  record,  namely,  the  document  on  which  is  recorded  the 
times  at  which  the  employees  enter  and  leave  the  plant.  In  other 
cases  the  pay-roll  is  made  up  from  the  shop  or  departmental  rec- 
ords, usually  cards  or  slips  that  are  filled  out  to  show  how  the 
time  has  been  used  on  or  distributed  to  orders. 

To  describe  all  the  various  devices  that  are  in  use  and  the  differ- 
ent methods  that  are  employed  in  securing  gate  time  and  time  on 
orders  would  require  many  chapters.  Such  a  discussion  would 
also  be  unprofitable,  inasmuch  as,  in  the  author's  opinion  there 
is  very  little  to  choose  between  the  various  methods — accuracy 
depending  much  more  on  the  way  in  which  they  are  carried  out 
than  on  the  employment  of  any  specific  combination  of  cards 
forms,  clocks,  etc.  In  this  chapter,  therefore,  attention  will  be 
given  rather  to  the  essential  ends  to  be  reached  than  to  particular 
ways  of  reaching  them.  But  as  some  mechanism  must  be  intro- 
duced for  the  sake  of  illustration,  the  very  simplest  and  most 
elementary  will  be  selected  for  that  purpose,  as  the  underlying 
principles  will  be  more  clearly  demonstrated  in  that  way.     And  to 


2 1 S      MA  N I  FA  CTl  rRING  (  OSTS  AND  ACCOUN  TS 


o  with  it  will  be  assumed  that  payment  on  a  simple  time  basis, 
thai  is  daywork,  is  alone  employed  in  the  plant. 


Gate 
Time 
Record 


TT 


New 

Man 


New 
Rate 


Pay  Roll 


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Salaries  Book 


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Uh 

->-  Salaries 

-*■  Wages 


"X< 


To 
Selling 
Expense 


Transfer 


7 


Wage 

Rate 

Register 


'  ■'      46.      I  >iagram  of  time  and  pay  (daywork). 

The  diagram   I  jlt.    16  Bhows  the  principal  books  and  blanks 
concerned  with  the  record  and  accounting  of  time  and  pay  on 


TIME  AND  PAY 


219 


the  day  work  plan.  The  first  and  most  important  consideration  is 
to  obtain  a  trustworthy  record  of  the  time  actually  worked  by 
each  employee.  While,  as  stated  above,  it  is  possible  to  obtain 
this  information  from  the  shop  records  where  great  care  is  taken 
in  the  recording  of  the  latter,  it  is  the  author's  opinion  that,  owing 
to  the  peculiar  nature  of  the  transactions  involved,  and  the  many 
temptations  to  fraud  constantly  present,  it  is  in  all  cases  desirable 
to  provide  a  wholly  independent  gate  time  mechanism  for  the 
computation  of  earnings.  Then  where  careful  shop  records  are 
also  available,  the  agreement  of  the  two  records  will  form  the  best 
safeguard  against  both  accidental  and  intentional  errors. 

The  cycle  begins  with  the  identification  of  the  man.  On 
engagement  each  employee  will  be  assigned  a  check  number  or 
clock  number,  which  serves  to  designate  as  a  rule  his  department 
or  type  of  labor  as  the  case  may  be. 


Pay  Roll 
Gate 

New  Employe 

Wage  Register 

Name 
Dept. 
Trade 

CMp.cM  Nn, 

Rnto 

Began 
Work 

Hi 

rar 

Fig.  47. — Advice  of  engagement. 


On  the  engagement  of  a  new  employee  the  first  step  is  to  fill  out 
the  blank,  Fig.  47,  in  which  the  name,  the  department,  the  check 
number,  the  trade  and  the  rate  of  the  new  employee  are  entered. 
This  is  signed  by  the  foreman  or  other  person  entrusted  with  the 
engagement  of  new  employees.  The  day  and  hour  at  which  he 
began  work  is  also  entered.  This  advice  note  is  then  forwarded 
to  the  gate  office  where  a  record  is  made  of  the  new  number.  The 
note  is  then  forwarded  to  the  pay-roll  office  for  entry  on  the 
pay-roll. 

There  are  various  methods  of  registering  the  in  and  out  time 
of  employees  as  they  pass  the  gate.  The  method  now  most 
usually  adopted  is  that  of  the  clock  system.  Each  employee  is 
allotted  a  card,  which  cards  are  kept  in  racks,  so  numbered  that 
the  employee  can  immediately  pick  out  his  card  in  passing  the 
rack,  without  any  delay.  To  record  his  time  the  man  takes  out 
his  card  and  inserts  it  in  a  slot  in  the  clock  frame,  pulls  a  lever, 


MANUFACTURING  COSTS  AND  ACCOUNTS 

and  thereby  obtains  a  stamped  entry  of  the  actual  time  at  which 
he  passes  the  clock,  lie  then  places  the  card  in  a  similar  rack  on 
the  other  side  of  the  dock,  as  indicated  by  the  numbers  arranged 
on  the  rack.  This  procedure  is  gone  through  each  time  he  enters 
or  leaves  the  plant.  The  principal  objects  aimed  at  in  instituting 
stem  of  gate  time  keeping  are  these:  First,  to  ascertain  the 
hour  and  minute  at  which  each  employee  enters  and  leaves  the 
premises.  Secondly,  to  distinguish  those  who  are  late  from  those 
who  have  arrived  punctually.  Thirdly,  to  record  absentees.  In 
different  plants  the  method  of  handling  late  attendance  varies, 
i  ses  as  soon  as  the  whistle  blows,  further  access  to  the 

clocks  is  shut  off  and  the  men  are  required  to  wait  for  a  given  time, 
,  or  '  _>  hr.,  before  they  are  allowed  to  record  their  time  and 
the  clock.     In  other  cases  the  men  are  allowed  to  pass 
i he  dock  at  all  times,  but  are  not  credited  for  their  attendance 
until  the   J  t   or  }-'i  hr.  has  elapsed..     These  measures  are  ob- 
viously adopted  for  the  sake  of  discipline  and  from  the  accounting 
point  of  view  the  main  thing  to  be  observed  is,  that  whatever 
mechanism  is  set  up  shall  clearly  distinguish  between  late  arrivals 
and  punctual  arrivals.     One  way  of  doing  this  is  by  the  use  of  a 
dock  which  prints  late  arrivals  in  a  different  colored  ink.     This 
-  the  time  of  the  gatekeeper  in  going  over  the  cards,  inasmuch 
as  where  entries  appear  in  black  ink,  he  knows  that  the  full  time 
lias  been  made,  without   the  necessity  of  referring  to  individual 
entries.     On  the  other  hand,  where  colored  figures  appear,  they 
call  attention  to  the  necessity  for  scrutinizing  them  and  ascertain- 
ing her  the  man  is  to  be  penalized  or  not,  or  to  what  extent 
he  is  to  be  penalized. 

The  method  of  making  a  gate  time  record  will  vary  in  different 
Where  a  daily  system  of  time  and  cost  keeping. is  in  use 
a  simple  list  of  the  absentees  and  late  arrivals  will  be  sufficient. 
A  printed  form  can  be  used,  listing  all  the  Qumbers  current  in  the 
various  departments,  and  against  these  numbers  a  check  mark 
may  be  placed  if  the  man  has  made  full  time  for  the  day,  and 
where  he  has  failed  to  do  this,  the  actual  number  of  hours  he  has 
mad'-  should  be  substituted  for  the  check  mark.  In  the  case  of 
absence,  the  word  "absent"  will  be  written  against  his  check 
number.  Where,  on  the  other  hand,  pay-rolls  and  costs  are 
made  u])  only  weekly  then  it  is  usual  to  make  use  of  a  book  in 
which  a  column  is  provided  for  each  day  of  the  week  and  the 
various  entries  jusl  mentioned  are  made  day  by  day  opposite  the 


TIME  AND  PAY  221 

man's  check  number.  Then  at  the  end  of  the  week  the  total 
time  that  he  has  made  is  aggregated  and  placed  in  a  total  column. 

The  use  of  mechanical  appliances  for  recording  gate  time  in 
place  of  the  old-fashioned  check  system,  must  not  give  rise  to  a 
false  security.  No  clock  system  is  positively  proof  against  fraud. 
It  is  essential  to  have  a  timekeeper  whose  integrity  may  be  relied 
on  and  whose  duty  it  is  to  watch  the  men  as  they  make  their 
entries  at  the  clock.  Otherwise,  several  kinds  of  fraud  may  be 
perpetrated.  For  example:  One  man  may  take  down  and 
stamp  two  or  three  cards,  or  in  the  case  of  those  clocks  which 
record  late  arrivals  in  colored  ink,  the  private  use  of  colored 
carbon  paper  by  the  men  has  been  known  to  transform  late 
arrivals  into  punctual  arrivals,  as  far  as  the  color  went.  If  the 
records  are  to  be  accurate  the  making  of  them  must  be  supervised 
regularly,  and  if  this  is  done  the  temptation  to  beat  the  clock  will 
not  so  readily  arise  because  a  safe  opportunity  will  be  lacking. 

From  an  administrative  point  of  view  it  is  desirable  that  the 
timekeeper  should  prepare  lists  of  late  arrivals  and  absentees, 
for  the  use  of  the  management.  In  this  way  the  men  who  are 
habitually  late  can  be  picked  out  and  admonished.  It  is  also 
desirable  to  furnish  the  foreman  with  the  names  and  numbers  of 
absentees  as  soon  as  the  usual  period  of  grace,  say  }4  or  34  hr., 
has  elapsed,  in  order  that  he  may  make  provision  to  carry  out  the 
work  of  the  absentees.  From  the  accounting  viewpoint,  how- 
ever, the  principal  thing  which  is  sought  to  be  affected  by  the 
institution  of  gate  time  is  the  ascertainment  of  the  amount  due 
to  each  man,  day  by  day.  Fig.  48  shows  a  blank  suitable  for 
recording  gate  time  where  information  is  only  required  to  be 
summarized  weekly.  It  contains  columns  for  the  department, 
check  number,  and  name  of  man  and  also  columns  for  each  day 
of  the  week,  subdivided  into  ordinary  and  overtime.  In  these 
columns  the  number  of  hours  worked  are  entered.  Next  come 
summary  columns  for  aggregating  the  ordinary  time,  and  extend- 
ing it  into  wages,  and  also  for  aggregating  overtime,  and  extend- 
ing it  into  wages.  The  final  column  shows  the  amount  payable 
to  the  man. 

The  gate  time  entries  thus  recorded  must  now  be  entered  on  a 
pay-roll.  Fig.  49  represents  a  pay-roll  suitable  for  weekly 
entries.  This  is,  in  effect,  a  copy  of  the  gate  timekeeper's  record, 
with  the  exception  that  the  daily  entries  of  time  are  omitted,  only 
the  total  of  hours  and  ordinary  wages  and  the  total  of  hours 


222      M. \  N 1 7'.  1  (  TURING  COSTS  AND  ACCOUNTS 


o  £ 


B 

-- 


Total 
Payable 

( 

03 

0 

_o 

o 

a 

■d 
a 
Q 

"3 
o 

H 

CO 

w 

T-t 

& 

1     2 

Bonu3 
Earned 

o 

a 

> 
O 

| 

) 

o 

>>    s 

>a       to 
o     £ 

u 

oi         » 

c       £ 
d       5 

S     g 

1 

No. 

TIME  AND  PAY  223 

and  overtime  are  entered  opposite  each  man's  name.  Additional 
columns  are  also  provided  for  the  addition  of  bonus  earned,  which 
is,  of  course,  a  matter  entirely  independent  of  time  and,  therefore, 
it  does  not  enter  into  the  gatekeeper's  record.  Further,  columns 
are  provided  for  deductions,  which  may  be  for  various  purposes 
which  need  not  now  be  further  discussed.  The  total  earnings, 
less  the  total  deductions,  form  the  total  payable,  a  column  for 
which  is  provided  on  the  extreme  right  hand  of  the  sheet. 

We  have  now  to  consider  a  more  advanced  form  of  time  and 
cost  keeping  in  which  records  are  made  each  day  of  the  man's 
gate  time,  this  being  agreed,  day  by  day,  with  the  account  of  his 
work  in  the  shops  as  shown  by  a  Time  Sheet  or  set  of  Time  Cards. 
In  such  a  system  the  gate  time  is  used  mainly  as  a  check  upon  the 
accuracy  of  the  Time  Card.  These  latter  form  the  official  source 
of  all  entries.  While  these  cards  and  method  of  their  com- 
pilation will  be  dealt  with  later,  it  will  be  necessary  to  state  at  this 
point  that  a  record  is  made  up  in  the  shops  showing  what  each 
man  has  done  during  the  day,  that  is  to  say  the  orders  on  which 
he  has  worked,  and  the  time  he  has  devoted  to  each  order.  As 
regards  any  particular  man  there  may  be  only  one  card,  supposing 
that  he  has  been  working  only  on  one  job  all  day,  or  there  may 
be  half  a  dozen  cards  representing  the  allocation  of  his  time  to 
half  a  dozen  different  jobs.  Each  morning  the  previous  day's 
cards  are  received  by  the  pay  clerk,  and  put  through  a  series  of 
operations,  including  verification  of  the  actual  hours  worked,  its 
extension  into  money  against  each  order  worked  upon,  the  total- 
ing of  the  amount  of  money  earned,  and  the  recording  of  the  latter 
in  a  daily  pay-roll.  The  object  of  this  procedure  is  to  obtain  an 
exact  agreement  between  the  pay-roll  totals  and  the  different 
allocations  to  orders.  It  also  enables  the  exact  cost,  day  by  day, 
of  each  order  to  be  ascertained,  and  various  cost  classifications 
set  up,  such  as  the  division  of  time  into  productive  and  non- 
productive, the  total  amount  allocated  to  repairs,  the  expenditure 
on  indirect  labor,  and  various  similar  items,  which  information, 
if  promptly  ascertained  each  day,  is  of  great  importance  to  the 
management  officials. 

The  first  duty  of  the  pay  clerk  upon  receiving  the  men's  cards 
will  be  to  aggregate  the  hours  worked  on  an  adding  machine,  and 
compare  the  total  so  accounted  for,  with  the  gate  time  as  shown 
by  the  timekeeper's  returns.  Any  discrepancy  must  be  imme- 
diately inquired  into.     For  the  most  part  such  discrepancies  will 


22 1      MA  X I  'I  A  CTl  h'lXG  COSTS  AND  ACCOUNTS 

arise  on  the  matter  of  late  attendance,  odd  quarters  and  half 
hours  being  frequently  credited  to  the  man  where  the  gate  time 
disallows  them.  On  first  introducing  such  a  system,  errors  of 
this  kind  will  be  found  frequently,  but  with  steady  persistence  in 
running  down  each  such  error,  day  by  day,  as  it  is  found,  and 
interviewing  the  persons  concerned  in  a  tactful  manner,  a  very 
few  weeks  will  suffice  to  produce  a  high  degree  of  agreement 
between  gate  time  and  shop  time  as  shown  by  the  cards. 

Having    made    this  agreement,  and    having  found  that  each 

man's  time,  as  shown  by  his  cards,  actually  agrees  with  the  time 

own  by  the  timekeeper's  record,  the  pay-roll  clerk  then 

proceeds  to  extend  this  time  into  money.     To  do  this  he  must 

have,  of  course,  an  up-to-date  and  convenient  form  of  record  of  the 


Check 
No 


Name 


Trade 


Rate 


Deduc 
Items 


"0. — Wage  Rate  Register  (Rand  index).     The  slips  can  be  withdrawn  or 
inserted  at  any  place. 


Date  AddecL 


-Withdrawn 


50A. — Back  of  one  of  above  slips  showing  date  record, 
slips  are  filed  alphabetically  in  reserve  file. 


Withdrawn 


men's  rates.  Such  a  record  is  shown  in  Fig.  50.  The  record  is 
made  in  a  Eland  index,  which  is  a  frame  holding  slips  of  card- 
board (or  papei  in  celluloid  tubes)  which  can  be  inserted  in  any 
ord.r  and  withdrawn  for  alteration  or  substitution  at  any  moment 
without  disarranging  the  rest  of  the  record.  The  face  of  the  slips 
will  contain  spaces  for  check  number,  name  of  man,  trade,  rate, 
and  a  further  column  for  noting  that  his  total  pay  is  subject  to 
deduction  of  some  kind  or  other,  such  as,  for  instance,  where  the 
employer  collects  club  money,  etc.  The  various  leaves  of  the 
index  , -.-in  be  80  arranged  that  one  or  more  leaves  is  devoted  to 
each  department.  In  r^-li  leaf  the  numbers  will  run,  of  course, 
serially,  bo  that  when  the  pay  clerk  receives  a  pile  of  cards,  from 
any    particular  departmenl    and    has   sorted   these  into  men's 


TIME  AND  PA  V  225 

numbers,  and  has  checked  each  man's  time  with  the  clock,  he 
can  then  turn  without  loss  of  time  to  the  wage  rate  register  and 
ascertain  the  man's  rate.  Each  Shop  Card  or  Time  Card  is  then 
extended  at  this  rate,  and  the  cards  are  then  ready  to  enter  on  the 
pay-roll. 

The  operation  of  reckoning  wages  is  a  simple  one  if  proper 
arrangements  are  provided.  There  are  many  schemes  for  cal- 
culating wage  rates  but  most  of  them  are  somewhat  complex. 
The  simplest  method  is  to  have  a  "ready  reckoner"  Fig.  51  and  as 
printed  reckoners  are  not  easily  to  be  found  it  may  be  advisable 
for  the  firm  to  construct  its  own.  The  ready  reckoner  blank, 
Fig.  51,  is  printed  as  shown  in  the  illustration  and  the  various 
money  amounts  are  intended  to  be  entered  by  hand.  One  such 
sheet  is  allotted  to  a  particular  rate  and  this  rate  may  be  so 
much  per  week,  or  month,  or  so  much  per  hour,  as  desired.  It 
will  be  seen  that  the  sheet  provides  spaces  for  the  money  amount, 
or  money  value  of  }/i  hr.,  and  so  by  quarters  of  an  hour  up  to 
12  hr.  Two  columns  are  provided,  one  for  ordinary  day  time 
and  the  other  for  overtime.  This  enables  overtime  calculations 
to  be  made  by  simple  reference  to  the  sheet.  In  dealing  with 
each  man's  cards,  therefore,  the  corresponding  sheet  to  his  rate 
is  turned  up.  The  amounts  chargeable  to  each  order  are  rapidly 
entered  on  the  cards  by  reference  to  the  ready  reckoner  and  then, 
as  a  check  on  the  accuracy  of  the  extension,  the  total  amount  of 
time  represented  by  all  the  cards,  is  also  extended  into  money 
and  checked  with  the  total  of  the  various  allocations  as  shown  on 
the  cards  themselves.  Thus,  if  there  are  five  cards  and  the  man 
has  worked  in  all  8  hr.,  at  20  cts.  an  hour,  making  the  total 
payable  of  $1.60,  then  all  the  cards  must  aggregate  exactly 
$1.60.  This  is  by  no  means  a  matter  of  course,  inasmuch  as 
the  work  on  one  or  more  orders  or  jobs  may  have  involved 
reckoning  }^  hr.,  in  which  case  there  may  be  a  discrepancy  be- 
tween the  aggregate  of  all  the  cards  and  the  total  per  ready  reck- 
oner of  1  or  more  cents.  It  is  most  important  that  this  discrep- 
ancy should  be  eliminated  at  this  stage.  The  total  due  to  the 
man  should  be  reckoned  upon  the  full  amount  of  time,  that  is  to 
say  the  8  hr.  that  he  has  worked,  and,  if  any  discrepancy  exists 
it  should  be  eliminated  by  altering  the  amount  on  one  of  the 
cards  to  the  extent  of  a  cent  or  so  in  order  to  bring  the  total  of 
the  cards  to  agreement  with  the  total  per  reckoner.  The 
necessity  for  this  must  be  understood.     After  the  entry  on  the 

15 


MANl  I'M  TI  WING  COSTS  AND  ACCOUNTS 


RATE 

HUS. 

ORD'Y. 

OVERTIME 

HRS. 

ORD'Y. 

OVERTIME 

6H 

1  | 

6V2 

• 

63^ 

1 

7 

1 

714 

7H 

134 

7?i 

2 

8 

2U 

8U 

21 2 

8i  2 

03/. 

—   •> 

834 

3 

9 

3H 

9M 

3V-2 

M* 

3% 

9?4 

1 

10 

414 

1014 

101/2 

■1\ 

103^ 

5 

11 

5'4 

11  >4 

51/2 

IH/2 

1 

113^ 

6 

12 

51.  -Blank  for  "Ready  Reckoner.' 


TIME  AND  PAY  227 

pay-roll  of  the  total  amount  payable  to  the  men,  the  cards  them- 
selves will  be  passed  on  to  the  cost  department,  and  at  a  sub- 
sequent stage  an  agreement  between  the  pay-roll  for  any  period 
and  the  costs  for  any  period  will  have  to  be  made.  Now,  if 
discrepancies  between  the  total  time  per  pay-roll  and  the  allo- 
cated time  per  cards  are  left,  these  will  mount  up  in  a  short  while 
to  quite  a  considerable  sum,  and  render  it  impossible  to  get  any 
satisfactory  agreement  between  cost  and  pay-roll. 

The  total  amount  of  each  man's  earnings  for  the  day  having 
been  found  and  agreed  with  the  small  pile  of  cards  which  repre- 
sents his  day's  work,  the  aforesaid  earnings  must  now  be  entered 
upon  a  pay-roll.  The  blank,  Fig.  52,  represents  a  form  of  pay- 
roll suitable  for  use  in  this  way.  Each  vertical  column  repre- 
sents the  record  of  one  man  for  one  week.  Some  of  the  horizontal 
columns  represent  the  days  of  the  week,  as  will  be  seen  by 
reference  to  the  figure  and  each  of  these  horizontal  columns  is 
divided  into  two  portions  by  a  thin  line.  The  vertical  columns 
are  also  divided  into  two  portions.  This  means  that  four  little 
squares  are  provided  against  each  day  of  the  week  and  for  each 
man.  The  upper  pair  of  each  set  of  squares  is  intended  for  the 
record  of  the  ordinary  hours  and  the  ordinary  wages.  The 
lower  set  of  squares  is  intended  for  the  record  of  overtime  hours 
and  overtime  wages.  It  is  recommended  that  these  latter 
figures  be  inserted  in  colored  ink.  At  the  foot  of  the  columns 
spaces  are  provided  for  totaling,  first,  the  ordinary  time,  secondly, 
the  overtime,  also  for  any  bonus  to  be  paid,  leading  to  a  grand 
total  of  earnings  for  the  week.  Then  comes  a  space  for  de- 
ductions, and  a  further  space  for  the  total  net  amount  payable 
to  each  man.  Cross-totaling  of  each  horizontal  column  gives 
the  total  payable  for  the  day,  and  as  one  or  more  sheets  of  such 
a  pay-roll  are  identified  with  particular  departments,  it  is 
a  very  easy  matter  to  obtain  the  total  payable  in  each  depart- 
ment each  day.  This  is  necessary  for  agreement  with  cost 
figures  later  on. 

It  will  be  seen  by  the  foregoing  that  we  have  ascertained  the 
money  value  of  each  man's  time  for  each  day;  that  we  have 
agreed  this  money  value  with  the  money  value  charged  against 
each  of  the  orders  on  which  he  has  worked  as  shown  by  the 
shop  cards;  and,  that  we  have  entered  this  daily  amount  to  his 
credit  in  a  pay-roll,  distinguishing  between  overtime  and  ordi- 
nary   time.     The    cross-totaling  of  this  pay-roll  gives  us  the 


228       MANUFACTURING  COSTS  AND  ACCOUNTS 


TIME  AND  PAY  229 

total  amount  chargeable  to  each  department  each  day,  and  if 
necessary  this  may  be  subdivided  into  overtime  and  ordinary  time. 
The  vertical  totalling  of  the  pay-roll  gives  us  the  total  earnings 
of  the  man  for  the  week.  All  these  totals  are  in  agreement. 
We  have,  therefore,  laid  a  secure  foundation  for  our  costing 
operations  at  a  later  date.  By  handling  the  time  daily  we  are 
enabled  to  track  down  any  errors  immediately  they  occur,  and 
while  they  are  fresh  in  every  one's  mind.  As  the  Shop  Cards 
have  been  extended  into  money  it  will  be  seen  later  that  prompt 
information  of  various  kinds  can  be  afforded  to  the  management. 

In  other  words  we  have  cleared  up  each  day's  work  as  we  go 
along,  and  it  follows  from  this  that  the  operations  of  making 
out  the  pay-roll  at  the  end  of  the  pay  period  are  confined  to 
simple  addition  of  the  amounts  already  entered.  Each  day's 
time  having  been  checked  with  the  gate,  no  further  check  is 
necessary.  Moreover,  as  the  time  credited  to  each  man  is 
shown  on  the  pay-roll,  if  any  dispute  arises  the  matter  can  be 
traced  to  the  particular  day  on  which  the  discrepancy  occurs, 
with  great  ease.  It  is,  of  course,  understood  that  in  all  cases 
of  dispute  between  the  workman  and  the  firm  the  clock  time  is 
to  be  taken  as  authoritative. 

So  far  we  have  only  considered  the  question  of  day  wages. 
In  a  large  number  of  plants,  however,  some  system  of  payment 
by  results  will  be  found  in  use.  The  system  adopted  may  be 
that  of  straight  piecework,  in  which  a  given  price  is  paid  for  an 
article  or  so  many  articles  as  completed  by  the  man,  or  it  may  be 
some  of  the  more  complicated  systems  of  premium  or  bonus  are 
employed.  From  the  point  of  view  of  the  pay-roll,  however, 
we  have  only  two  things  to  consider.  First,  the  authority  for 
entering  an  amount  on  the  pay-roll  to  the  particular  man,  and 
secondly,  how  far  verification  can  be  applied  to  the  item.  It  is 
evident  that  our  system  of  checking  by  means  of  gate  time  will 
not  apply  here.  The  man's  earnings  are  obviously  quite  in- 
dependent of  the  time  that  he  may  spend  on  the  work  Never- 
theless it  is  an  excellent  plan  to  have  all  men,  whether  day 
workers  or  piece  workers,  registered  at  the  gate  in  the  same 
manner.  In  some  cases  the  calculation  of  burden  is  dependent 
upon  the  number  of  hours  the  men  work.  In  all  cases  it  is 
most  advantageous  for  the  management  to  know  the  relation 
between  the  time  actually  spent  on  the  job,  and  the  hours 
worked  by  the  man.     But  from  a  purely  accounting  point  of 


230      MA  VUFAt  TURING  COSTS  AND  ACCOUNTS 

view  there  is  no  relation  between  gate  time  and  bonus  or  piece- 
work earnings.  We  shall,  therefore,  have  to  depend  on  some 
other  source  for  the  verification  of  amounts  alleged  to  be  due  to 
particular  men. 

This  is  sometimes  a  matter  of  difficulty.  The  calculations 
of  piecework  earnings  is  a  somewhat  technical  matter.  In  other 
.  where  list  prices  are  in  use  and  the  kind  of  work  does  not 
vary  greatly,  it  is  not  a  difficult  matter  to  provide  the  pay-roll 
clerk  with  a  set  of  the  piecework  prices  and  thus  enable  him  to 
check  up  the  extensions,  and  not  only  the  extensions  but  the 
correctness  of  the  price  placed  against  each  item.  Two  factors 
are  obviously  involved:  First,  the  number  of  pieces  or  quantity 
of  work  done;  and  secondly,  the  price  to  be  paid  for  each  piece  or 
sel  of  pieces.  The  first  of  these  items  is  more  difficult  of  verifica- 
tion than  the  second  in  some  plants.  Where  articles  are  made  and 
turned  into  stores  the  storekeeper's  record  of  the  quantity  re- 
1.  and  for  which  he  is  responsible,  may  be  taken  as  a 
means  of  checking  the  statement  of  the  piece  record.  But  in 
many  shops  the  work  passes  from  one  man  to  another.  Prices 
are  subject  to  deductions  for  imperfect  and  spoiled  wrork.  Lots 
which  start  out  complete  in  number  become  diminished  in  the 
course  of  their  passage  through  the  shop,  so  that  the  piece  workers 
towards  the  end  of  the  passage  are  working  on  a  less  number  than 
at  the  beginning.  It  is  obvious  that  no  simple  mechanism 
can  be  described  for  diking  care  of  conditions  like  these. 

It  is,  therefore,  sufficient  to  point  out  here  that  whatever  records 
are  presented  to  the  pay  clerk  as  his  authority  for  entering  an 
amount  to  the  credit  of  a  man  on  the  pay-roll  should  be  subject 
to  some  system  of  verification  by  him  or  for  him.  With  this 
proviso  duly  applied  there  is  nothing  special  about  the  treatment 
of  piecework  in  a  pay-roll  such  as  that  just  described.  The 
amount  earned  by  the  man  each  day  on  finished  contracts  is 
entered  precisely  the  same  as  if  it  were  daywork,  except  that,  of 
course,  no  hours  appear  againsl  each  entry.  It  is  advisable  that 
piecework,  also,  be  entered  in  a  specially  colored  ink  and  its 
amount  brougb.1  oul  in  departmental  totals  separately  from  that 
of  day  time  and  overtime.  The  word  "piecework"  as  used  here 
includes  all  kind-  of  payments  by  results  except  departmental 
bonuses  or  group  bonuses,  which  are  extra  earnings  made  to  men 
ial  efficiency  which  has  been  brought  about  by  their 
united  effort.     Such  bonuses  are  usually  calculated  at  intervals 


TIME  AND  PAY 


231 


of  a  month.  They  should  then  be  entered  on  the  line  devoted 
to  "Bonus"  is  the  pay-roll.  All  other  bonuses  such  as  those 
arising  out  of  premium  systems  or  bonus  systems,  will  be  treated 
as  ordinary  piecework  and  entered  as  just  described. 

In  many  cases  indeed,  especially  where  jobs  last  a  considerable 
time,  it  is  not  an  unusual  practice  to  credit  men  with  their  day 
wages  in  the  ordinary  way,  and  then,  upon  the  completion  of  the 
job,  reckon  up  the  difference  between  the  day  wages  so  received, 
and  the  piece  or  contract  price  of  the  work,  and  credit  them  with 
the  difference.  This  is  called  a  piecework  balance,  or  premium 
balance.  It  is  entered  in  exactly  the  same  way  as  if  it  were  a 
straight  price  for  the  work  done.  From  many  points  of  view 
this  method  of  settling  piecework  earnings  is  preferable  to  the 
more  common  practice  of  ignoring  the  daywork  earnings  and 


Pay  Roll 
Gate 

Transfer 

Wage 

Eegister 

Old  Dept. 

New  Dept. 

Check  No. 

Check  No, 

"Rate 

Rate 

TrnHp 

Trade 

D.-ite 

at 

Hour 

Fig.  53. — Advice  of  transfer  to  another  department. 

making  entries  only  on  the  completion  of  the  piecework.  Whether 
or  not  it  can  be  adopted  depends  very  largely,  however,  on  the 
kind  of  work  being  clone  at  the  plant. 

Minor  arrangements  to  facilitate  the  work  of  the  pay  clerk  in- 
clude notification  when  a  man  is  transferred  from  one  department 
to  another,  and  also  when  a  man  has  had  his  rate  changed  or  ad- 
vanced. Fig.  53  represents  an  advice  of  transfer  giving  all  data 
necessary  to  enable  alterations  to  be  made  on  the  pay-roll  and  in 
the  wage  register.  Fig.  54  shows  a  blank  also  suitable  for  chang- 
ing rate.  Such  changes  of  rate  should  only  be  made  at  the  end  of 
pay  periods.  The  practice  of  changing  the  rate  suddenly  in  the 
middle  of  the  week  is  a  very  confusing  one  and  there  is  no  real 
necessity  for  it. 

It  is  the  usual  practice  to  keep  a  record  of  each  workman's 
changes  of  rate  and  other  data   concerning  his  employment. 


MANUFAi  TURING  COSTS  AND  ACCOUNTS 

netimes  very  elaborate,  but  a  convenient  and  suffi- 
ciently comprehensive  record  for  most  purposes  will  be  found  in 
Fig.  55.  The  lower  part  of  the  card  is,  of  course,  not  filled  out 
unless  the  workman  leaves  or  is  discharged.     "When  this  happens, 


Change  of  Rate 

Check  No. 

to  take  effect  in   next   Pay   Period 

Foreman 

Fig.  54. — Advice  of  change  of  wage  rate. 

the  card  is  taken  out  of  the  current  file  and  placed  in  a  "Former 
Employees"  file  in  alphabetical  order.  The  use  of  the  card  will 
be  easily  understood  from  examination  of  the  wording. 

The  diagram,  Fig.  4(3,  may  now  be  referred  to,  in  order  that  the 
whole  cycle  of  operations  with  regard  to  time  and  pay  may  be 


Name 

Check 
Xo. 

Trade 

Address 

Date  Started 

1    Date  Left 

Kate 

Date 

Rate 

Date             Rate 

Date 

Rate 

Date 

Record 
Time-  Keeping- 


Honesty  

Industry 


-Sobriety 

__Intelligence_ 


55. — Workman's  record  card. 

ie.     Though  nothing  has  been  said  about  the 

readily  understood  that  this  is  nothing 

subdivision    of   the    pay-roll  made  for  convenience.     In 

the  Salaries  Book  are  controlled  by 

those  in  the  pay-roll.     But  as  changes 


TIME  AND  PAY  233 

in  the  salaried  staff  are  infrequent,  no  elaborate  mechanism  is 
necessary  to  keep  the  entries  in  this  book  up-to-date,  as  regards 
transfers,  changes  of  rate,  etc. 

In  regard  to  the  earnings  of  shop  employees  we  have  seen  that 
entries  arise  from  gate  time,  or  from  shop  records  (Time  Sheets 
or  Time  Cards)  agreed  with  gate  time,  or  from  shop  records 
of  piecework  or  premium  earnings.  The  entries  in  the  pay-roll 
may  be  made  weekly,  or  daily.  In  the  latter  case,  daily  agree- 
ments are  made  with  the  shop  records  before  entry,  so  as  to  ensure 
that  the  basis  of  pay  and  of  cost  is  the  same.  The  amounts  due 
to  each  man  are  cross-totalled  so  that  the  amount  paid  in  each 
department  is  also  ascertained  daily. 

When  the  pay-roll  is  completed,  it  forms  the  official  authority 
for  the  payment  of  the  money.  It  thus  corresponds  to  the  bill 
or  invoice  in  the  other  forms  of  purchase  transactions  previously 
considered  (purchase  of  stores,  of  plant,  etc.).  The  Salaries 
Book  is  correspondingly  the  official  authority  for  the  payment  of 
salaries.  Consequently  the  totals  as  shown  by  these  two  books 
are  entered  on  the  Cash  Journal,  and  credited  to  Cash  on  the  one 
hand  and  respectively  to  Wages  account  and  to  Salaries  account 
on  the  other.  All  the  mechanism  above  described  is  set  up  to 
bring  about  this  result  correctly. 

At  the  end  of  the  month  we  shall  have  sundry  weekly  debits  in 
these  two  accounts,  just  as  we  had  sundry  debits  in  Stores 
and  Plant  accounts.  These  are  charges  to  Manufacturing  in 
essence,  and  as  all  charges  to  Manufacturing  are  credited  through 
the  cost  system,  or  more  specifically  through  either  Manufacturing 
or  Burden  Journals,  the  manner  in  which  these  credits  are  made 
may  be  conveniently  postponed  for  the  present. 

In  the  case  of  salaries  there  will  be,  and  in  the  case  of  weekly 
wages  there  may  be  a  certain  number  of  employees  whose  time, 
in  whole  or  in  part,  is  chargeable  to  Selling  Department.  Such 
amounts  are  indicated  on  the  Salaries  Book  and  pay-roll  and  are 
charged  in  the  Cash  Journal  to  the  selling  expense  column. 
They  are  thus  diverted  at  the  beginning  from  salaries  and  wages 
pertaining  to  manufacturing  operations,  and  we  need  not  consider 
them  further. 


THAPTER  X 
WORKS  EXPENSE,   AND   ADMINISTRATIVE   EXPENSE 

Purchased  items  chargeable  against  works  expense  are  usually 

neither  many  nor  important.  Most  of  the  expenditure  coming 
under  this  classification  arises  within  the  shops  from  the  use  of 
material  and  the  application  of  labor,  and  is,  therefore,  charged 
through  costs  and  not  through  the  purchasing  mechanism. 

Inasmuch  as  all  tangible  purchases  are  chargeable  in  the  first 
place  t<>  Stores  account,  and  all  labor  and  service  within  the  plant 
i-  chargeable  either  to  Wages  or  Salaries  account,  it  will  be 
evident  that  any  purchases  classified  as  works  expense  must  be 
in  the  nature  of  services  rendered  by  outsiders.  Unless  such 
items  as  power  from  electric  mains,  or  gas  from  a  gas  undertaking 
aie  purchased  from  outside,  purchases  on  works  expense  will  be 
confined  to  sundries  such  as  postage  stamps,  telephone  charges, 
rams,  and  such  freight  and  carriage  charges  as  are  not 
absorl  »able  1  y  st  <  >res.  Repairs  carried  out  by  outside  firms  would 
also  be  included  under  works  expense,  even  though  such  repairs 
included  the  supply  of  new  parts.  If,  however,  such  new  parts 
I  rilled  separately,  care  would  have  to  be  taken  that  they  were 
not  included  in  or  confused  with  stoics.  In  the  majority  of 
.  bills  for  repair  work  would  include  the  supply  of  parts  for 
repair  in  a  general  total  even  though  they  were  separately 
itemized.     Such  general  total  would  be  a  works  expense. 

Invoices  or  bills  for  an  item  of  works  expense  are  entered  in 
the  ('ash  Journal,  or  Purchases  Journal  as  the  case  may  be, 
Cash  or  Accounts  Payable  being  credited,  and  Works  Expense 
int  being  charged.  The  columns  headed  department 
expense  in  Purchases  Journal  are  not  used  unless  we  have  several 
Works  Expense  accounts,  one  for  each  department. 

The  credit  to  Work-  Expense  account  coined  from  the  Manu- 
facturing Burden  Journal,  ami  the  way  in  which  items  of  works 
expense  are  analyzed  and  charged  to  various  departments  will 

be  deall    with  under  t  hat    head. 

Normally   there  will   he  no  balance  remaining  in  the   Works 

234 


WORKS  EXPENSE  235 

Expense  account  at  the  month  end.  But  it  may  happen  occa- 
sionally that  where  a  large  sum  has  been  expended  in  a  given 
month,  or  what  amounts  to  the  same  thing,  a  large  bill  has  been 
received  or  paid  in  a  given  month,  for  contract  work  in  repairing 
buildings,  part  of  the  amount  may  be  held  up  for  distribution 
in  later  months.  Thus  if  a  bill  for  $1,000  has  been  received, 
it  may  be  considered  desirable  to  charge  this  amount  to  Manu- 
facturing Burden  in  say  10  monthly  installments  of  $100  each. 
In  this  case  the  credit  received  each  month  from  Burden  Journal 
will  be  only  for  $100,  leaving  at  the  end  of  the  first  month  a 
balance  of  $900,  at  the  end  of  the  second  month  $800  and  so 
forth.  The  presence  of  this  balance  converts  the  Works  Expense 
account  into  a  suspense  account  representing  a  payment  made  of 
which  the  benefit  has  not  yet  accrued.  It  will  thus  appear  as  an 
asset  on  the  Monthly  Balance  Sheet,  though,  of  course,  it  is  so 
only  in  a  qualified  sense.  Usually,  however,  such  an  item  would 
be  journalized  to  a  special  suspense  account  temporarily  opened 
for  the  purpose. 

Administrative  Expense. — In  all  plants  there  will  be  a  certain 
class  of  expense  that  is  mixed  in  character,  and  not  obviously 
divisible  between  selling  expense  and  factory  expense.  The 
salaries  of  the  president,  vice-presidents  and  higher  officers  of 
the  corporation,  partners'  salaries  in  a  private  firm,  salaries  of 
correspondence  clerks  and  bookkeepers,  depreciation  of  office 
buildings,  equipment,  furniture  and  fixtures,  stationery,  phone 
charges,  etc.  It  is  frequently  the  practice  to  assemble  such  items 
in  an  Administrative  Expenses  account,  as  was  indicated  in  Chap. 
Ill  (Part  I)  and  then  to  prorate  this,  by  means  of  a  journal  entry, 
between  factory  and  selling  expense.  Provided  that,  when  doing 
so,  the  bearing  of  each  item  on  the  division  is  considered,  this  is 
a  good  way  of  meeting  the  difficulty.  But  as  the  division  has  to 
be  made  at  some  time  or  other,  and  as  it  is  important  that  no 
general  percentage  be  applied  to  the  diverse  items  making  up  the 
total,  it  is  perhaps  just  as  well  to  make  the  division  at  the  time 
the  first  entries  are  made  regarding  the  respective  items  in  the 
books  of  account.  Thus  when  entering  salaries  in  the  Cash 
Journal,  it  is  a  simple  matter  to  fix  a  percentage  on  which  such 
salaries  should  be  charged  to  Selling  Expense  and  Factory 
Expense  respectively.  When  considering  depreciation  in  the 
Depreciation  Schedule,  it  is  not  difficult  to  arrange  that  deprecia- 
tion  on   items   mentioned   above   is   prorated   between   Selling 


236      MANUFACTURING  COSTS  AND  ACCOUNTS 

Expense  and  Factory  Office  Expense  to  begin  with.  Rents, 
-  and  insurance  are  dealt  with  in  the  Rents,  etc.  Schedule. 
And  so  on.  If  each  separate  class  of  mixed  expense  is  dealt  with 
in  this  way,  and  is  divided  on  its  own  individual  percentage,  fixed 
after  consideration  of  the  relative  bearing  of  selling  and  factory 
if  the  item  in  question,  closer  accuracy  is  likely  to  result  than 
if  all  such  charges  are  massed  in  one  total,  and  this  total  roughly 
divided  betweeD  selling  and  factory  on  an  arbitrary  basis. 

The  familiar  heading  "administrative  expense"  will  not, 
therefore,  appear  in  the  accounts  now  to  be  discussed.  It  is 
assumed  that  mixed  items  are  separated  into  factory  and  selling 
expense  at  the  first  time  of  their  entry  in  the  books,  and  conse- 
quently do  not  require  a  massing  or  distributing  in  any  formal 
"1-  special  account  or  journal. 


CHAPTER  XI 
GENERAL  VIEW  OF  THE  FOREGOING  OPERATIONS 

All  the  operations  described  hitherto  are  antecedent  to  actual 
manufacture.  Beginning  with  receipt  of  a  bill  or  invoice  or, 
with  a  payment  of  cash,  and  ignoring  for  the  present  all  such 
transactions  as  are  incurred  on  behalf  of  the  selling  department  of 
the  business,  we  have  seen  how  each  class  of  purchase,  by  means 
of  appropriate  columns  in  the  Cash  and  Purchases  Journals,  is 
steered,  so  to  speak,  into  its  own  particular  ledger  account.  Thus 
we  have  on  the  debit  side  of  these  accounts,  a  continual  piling  up 
of  amounts  representing  purchases  of  stores,  plant  and  equip- 
ment, auxiliary  equipment,  labor  (in  the  form  of  wages  and  sal- 
aries), service  (in  the  form  of  rents,  insurance,  taxes,  etc.),  and 
of  minor  services  assembled  under  the  head  of  works  expense. 

On  reference  to  the  general  diagram,  the  typical  accounts  repre- 
senting these  classes  of  transactions  will  be  seen  in  two  columns, 
the  journals  on  the  left  hand  providing  the  mechanism  for 
charging  the  ledger  accounts,  and  the  blanks  immediately  on  the 
right  providing  the  mechanism  for  measuring  out  the  amounts 
chargeable  to  Production  in  each  financial  period,  say  monthly. 

Thus  we  have  the  Stores  Issue  Book,  which  contains  the 
summary  of  the  transactions  relating  to  the  issue  of  stores  and 
materials;  the  Pay-roll  Allocation  Summary  which  summarizes 
the  amounts  earned  by  and  payable  to  each  worker  (a  Salaries 
Book  being  a  usual  subdivision  of  the  pay-roll,  but  not  an  es- 
sential one);  the  Depreciation  Schedule  which  is  a  medium  for 
calculating  how  much  of  the  original  value  of  the  buildings, 
plant,  tools  and  other  equipment  has  been  used  up  by  reason  of 
manufacturing  activity  during  the  period;  and  other  schedules 
for  calculating  the  incidence  of  regularly  recurring  purchased 
services,  such  as  insurance,  rents,  taxes,  etc.  These  mechanisms 
are  not  journals.  They  merely  serve  to  collect,  or  in  some 
cases  to  calculate,  the  data  for  journalizing. 

We  have  now  to  consider  how  the  amounts  piled  up  in  the  above- 
mention  ledger  accounts  are  credited  with  the  amounts  charge- 

237 


MANUFACTURING  COSTS  AND  ACCOUNTS 

able  to  Production  in  the  given  period,  and  we  shall  find  that  a 
prime  distinction  is  made  between  two  classes  of  such  expenditure, 

thing  like  one-half  of  it  being  considered  as  burden,  and  the 
remainder  as  the  direct  expense  of  production.  All  the  former 
class  is  dealt  with  through  the  Burden  Journal,  which  credits  the 
foregoing  ledger  accounts  on  the  one  hand,  and  charges  various 
manufacturing  departments  (in  departmental  Burden  accounts) 
with  their  due  share  of  burden.  All  the  latter  class  is  dealt  with 
by  means  of  a  .Manufacturing  Journal,  or  rather  by  a  series  of 
Manufacturing  Journals,  one  for  each  productive  department, 
which  credit  Stores,  Wages  and  "Works  Expense  accounts  with 
the  amounts  directly  chargeable  against  Production,  and  charges 
Departmental  Manufacturing  account.  The  latter  journal  also 
s  as  the  medium  by  which  burden  is  distributed  over  production 
orders,  so  that  in  addition  to  the  above-mentioned  credits,  the 
departmental  Burden  accounts  are  also  credited,  and  Depart- 
mental Manufacturing  account  charged.  These  operations  can 
be  readily  followed  on  the  general  diagram,  even  without  the 
detailed  explanation  which  will  be  given  in  the  following  chapters. 
A-  we  are  now  about  to  enter  upon  the  transactions  of  manu- 
facturing proper,  and  as  the  form  of  these  transactions,  that  is  to 
say,  the  allocations  and  subdivisions  of  expenditure,  is  dependent 
upon  the  way  in  which  orders  are  issued,  the  nature  and 
purpose  of  orders  will  be  considered  first.  It  is  a  cardinal  rule  of 
manufacturing  accounting  that  no  expenditure  shall  take  place 
save  in  virtue  of  an  order,  which  is  equivalent  to  saying  that 
every  item  of  expenditure  in  the  plant,  whether  in  the  shape  of 
stores,  Labor,  or  service  of  any  kind,  must  be  charged  to  an 
order  number.  Then,  as  every  order  number  is  represented 
by  a  Cost  Sheel  (or  set  of  Cost  Sheets)  it  will  follow  that 
the  whole  of  i  he  expendil  ure  in  a  given  period,  say  a  month,  will  be 
represented  somewhere  or  other  by  entries  on  Cost  Sheets.  Now- 
all  the  <  "~i  Sheets  pertaining  to  direct  production  are  assembled 
and  listed  in  the  Manufacturing  Journal,  and  those  pertaining 
to  overhead  expense  or  burden  are  assembled  and  listed  in  the 
Burden  Journal,  consequently  when  a  ledger  account,  such  as 

-.  ha-  been  credited  from  Burden  Journal  and  also  from 
Manufacturing  Journal,  ihc  amount  so  credited  will  agree  with 
the  total  stores  issues  for  t  he  month.  Agreements  of  this  kind,  as 
will  be  seen  later,  provide  a  guarantee  of  the  correctness  of  the 
very  numerous  I  ransact  ions  u  hich  are  recorded  on  the  Cost  Sheets. 


GENERAL  VIEW  OF  THE  FOREGOING  OPERA  TIONS     239 

In  connection  with  the  chapters  that  follow  the  student  should 
keep  in  mind  (1)  that  no  expenditure  can  be  credited  to  the  ledger 
accounts  unless  it  appears  somewhere  on  a  Cost  Sheet;  (2)  that 
every  Cost  Sheet  represents  an  order  number;  (3)  that  labor  is 
employed  and  stores  are  issued  only  in  virtue  of  an  existing  order. 
It  will  be  seen,  therefore,  that  the  order  sets  everything  in 
motion  within  the  plant.  To  its  corresponding  Cost  Sheet  the 
expenditure  on  the  order  is  charged.  And  at  the  end  of  the 
month  these  Cost  Sheets  arc  listed  and  summarized,  and  grouped 
in  various  ways,  but  primarily  into  the  two  great  divisions  of 
burden  and  production.  Finally  burden  is  distributed  or  pro- 
rated over  the  Cost  Sheets  representing  production  orders,  so 
that  Manufacturing  account  finally  is  charged  with  an  amount 
equal  to  all  the  credits  that  have  been  made  to  the  ten  ledger 
accounts  shown  on  the  left  hand  of  the  general  diagram.  This 
account,  therefore,  shows  the  cost  of  manufacture  for  the  month, 
if  we  neglect  the  balance  from  the  previous  month,  and  if  no  credits 
have  yet  been  made  for  finished  work  withdrawn  from  the  shops. 

The  total  of  all  the  production  Cost  Sheets  at  any  month  end 
must  agree  with  the  balance  in  Manufacturing  account,  inasmuch 
as  they  form  the  detail  of  that  balance,  much  in  the  same  way  as  the 
Stores  Item  Ledger  Cards  were  regarded  as  the  detail  of  the  Stores 
Control  account.  Manufacturing  account  may  be  regarded  as  a 
Control  account  of  work  in  process,  and  the  various  Production 
Order  Cost  Sheets  may  be  regarded  as  subsidiary  Item  Ledger 
Cards. 

One  further  explanation  may  be  given  at  this  stage  with  regard 
to  burden.  One  of  the  objects  of  Burden  Journal  is  to  allocate 
burden  to  departments,  but  these  are  not  necessarily  all  produc- 
tive departments.  If,  for  example,  in  the  example  shown 
in  the  general  diagram,  we  consider  that  department  1  is  the  power 
plant,  then  it  will  be  understood  why  that  department  is  shown  as 
"prorated"  over  the  remaining  departments  2  and  3.  The  fact 
is  that  though  it  is  important  to  ascertain  the  whole  cost  of 
running  that  department  separately,  it  is  in  itself  an  expense,  or 
in  other  words  it  is  not  a  productive  department.  Its  whole  cost 
must,  therefore,  be  absorbed  by  the  actual  productive  depart- 
ments on  some  basis — which  basis  in  the  case  of  the  power  plant 
would  be  the  amount  of  power  considered  to  be  taken  by  each  of 
the  productive  departments.  Two-thirds  might,  for  example, 
be  taken  by  department  2  and  one-third  by  department  3.     The 


240      MANUFACTURING  COSTS  AND  ACCOUNTS 

whole  cost  of  department  1  would,  therefore,  be  prorated  between 
2  and  3  in  that  proportion.  Thus  the  amount  standing  in  the 
column  devoted  to  department  1  is  extinguished.  Of  course,  a 
similar  result  would  be  attained  by  charging  a  ledger  account 
with  the  cost  of  department  1  and  then  crediting  it  with  the 
two-thirds  absorbed  by  department  2  and  the  one-third  absorbed 
by  department  3.  But  such  a  ledger  account  is  not  really  neces- 
sary, since  it  would  never  under  any  circumstances  contain  a 
balai 

Further,  il  may  occur  to  the  reader  that  some  work  might  be 
going  on  in  the  plant,  which  though  of  the  nature  of  an  expense, 
it  was  not  convenient  to  charge  out  to  any  particular  department 
in  the  month  in  which  it  occurred.  Thus,  for  example,  a  very 
extensive  repair  of  a  building  by  the  firm's  own  men  might  be 
proceeding.  How  would  such  expenditure  be  held  up,  and  dis- 
tributed over  future  months  by  installments?  Although  incurred 
fin-  the  benefit  of  department  3,  it  would  not  be  chargeable  all  at 
cure  to  thai  department.  It  would  be  held  up  by  the  simple 
means  of  charging  it  to  a  "Suspense"  account,  instead  of  to  the 
Department  3  Burden  account.  Alongside  Department  3 
Burden  account,  we  should  have  a  second  account  labelled  Depart- 
ment 3  Burden  Suspense  account.  The  amount  in  this  account 
could  be  charged  in  any  way  desired  to  the  Burden  account, 
month  by  month,  by  an  entry  through  the  General  Journal. 

Items  Chargeable  to  Selling  Expense. — It  should  be  understood 
that  almost  any  kind  of  purchase  whether  of  material  or  service 
may  require  dividing  between  the  factory  and  the  selling  depart- 
ment. Thus  certain  pay-roll  items,  and  certain  stores  issue 
items  may  be  chargeable  to  Selling  Department,  and  a  certain 
proportion  of  depreciation  (on  buildings  and  equipment  used  by 
the  selling  department  I,  and  of  rents,  insurance,  etc.,  will  require 
allocating  each  month  to  the  same  department.  Further  sundry 
items  like  stationery,  office  salaries,  postages,  telephone  rents, 
..  will  also  be  divisible  between  factory  and  selling. 

In  the  firsl  part  of  this  book,  (see  Chap.  Ill,  Part  I)  special 
journal-  were  shown  for  the  allocation  of  this  class  of  item,  but 
in  practice  thi  isually  unnecessary.     The  division  between 

selling  and  factory  lias  to  be  made  somewhere,  it  is  true,  but  the 
formality  of  a  special  journal  or  journals  is  superseded  by  the 
addition  of  columns  to  the  Pay-roll  Summary,  the  Stores  Issues 
the  Depreciation  and  Fonts  Schedules,  etc.,  so  that  the 


GENERAL  VIEW  OF  THE  FOREGOING  OPERA  TIONS     241 

amounts  chargeable  against  Selling  are  separated  from  those 
chargeable  to  Factory  at  the  very  commencement.  Then  we 
have  left  items  like  salaries,  and  office  expenses  which  are  mixed 
in  character,  that  is  to  say  that  certain  expenses  such  as  salaries 
of  the  higher  officials,  can  be  divided  between  Selling  and  Factory 
only  on  some  arbitrary  basis.  This  basis  must  be  carefully 
thought  out  and  fixed  by  authority,  and  the  division  can  then  be 
made  month  by  month  in  the  proportion  authorized,  at  the  first 
time  of  entry.  Thus,  salaries  will  be  allocated  between  selling 
and  factory  in  the  Cash  Journal;  telephone  rents,  postages  and 
minor  expenses  will  be  as  far  as  possible  tabulated,  and  the 
relative  use  of  them  by  selling  and  factory  recorded,  but  there  will 
be  in  most  cases,  a  residuum  which  can  be  allocated  only  on  an 
arbitrary  basis.  This  will  be  done  in  the  Cash  Journal,  or  in  the 
Purchases  Journal  as  the  case  may  be,  at  the  time  of  first  record 
of  the  transactions. 

The  alternative  to  this  procedure  is  to  charge  all  such  mixed 
items  to  a  General  Expense  account,  and  then  allocate  the  various 
items  between  factory  and  selling  by  means  of  a  special  journal, 
as  shown  in  Fig.  8  (Part  I).  Though  perhaps  the  most  logical 
and  systematic  way  to  handle  the  problem  of  mixed  expense,  the 
assistance  it  affords  is  more  apparent  than  real,  as  long  as  care  is 
taken  to  see  that  the  various  items  of  this  character  have  actually 
been  split  up  in  the  various  books  of  first  entry  as  described  above. 

It  is,  of  course,  important  to  insure  that  all  items  reaching  the 
Works  Expense  account,  are  really  works  expense,  and  do  not 
contain  any  proportion  of  what  should  be  selling  expense.  By 
throwing  all  doubtful  items  into  a  General  Expense  account 
and  thus  splitting  this  up,  a  certain  amount  of  increase  in  safety 
is  attained,  but  except  in  special  cases  should  not  be  necessary. 


10 


CHAPTER  XII 
ORDERS-    SERVICE  OR  STANDING   ORDERS 

The  object  of  setting  up  a  manufacturing  plant  is  to  make 
Is  or  otherwise  turn  out  salable  product.  But  very  little 
acquaintance  with  factory  work  demonstrates  that  a  considerable 
amount  of  activity  is  constantly  going  on  that  has  no  direct 
relation  to  the  making  of  anything  salable.  We  may  observe, 
for  example,  men  cleaning  windows,  sweeping  floors,  arranging 
stores  on  shelves,  shovelling  coal,  stoking  furnaces,  repairing 
machines,  buildings,  and  tools,  running  errands,  and  a  hundred 
other  varieties  of  occupation  for  which  obviously  no  customer  is 
tr« dnir  to  pay  directly. 

But  a1  the  same  time  it  is  well  to  keep  in  mind  that  all  these 
occupations  have  to  be  paid  for  by  the  customers  of  the  firm 
indirectly,  since  the  only  revenue  of  a  manufacturing  plant 
(in  its  manufacturing  capacity)  is  the  various  sums  which  are 
paid  to  it  by  customers  in  return  for  product  purchased  by  them. 

1  >n  the  other  hand,  when  we  sec  a  man  working  at  a  machine 
on  material  that  we  recognize  as  part  of  salable  product,  when  we 
see  him  turning  a  bolt  thai  we  know  is  part  of  the  steel  traps  that 
11,  or  when  we  observe  him  working  a  loom  on  which  is  being 
!  some  of  the  cloth  which  we  sell,  then  there  is  no  difficulty 
in  understanding  thai  pari  of  the  price  received  from  the  customer 
will  go  directly  to  pay  the  wages  of  men  so  occupied. 

1  appears  then  that  the  revenue  of  our  plant  as  received  from 
the  customers  in  return  for  product  furnished  to  them  must  be 
applied  first,  in  paying  for  the  raw  material  of  which  our  product 
consists,  and  also  for  the  wages  of  men  who  have  directly  worked 
up  this  raw  material,  and  secondly,  part  of  this  revenue  must 
be  applied  to  paying  for  coal  consumed  in  our  power  plant,  for 
oil  and  waste  consumed  in  our  shops,  for  lumber  consumed  in 
making  patterns,for  brass  and  steel  consumed  in  making  templets 
and  jigs,  for  the  wear  and  tear  (depreciation)  on  our  buildings, 
plant  ::•  d  equipment,  and  also  for  the  wages  of  our  power-plant 
staff,  ol  our  pattern  makers  and  tool  makers,  cleaners,  laborers, 
foremen,  superintendents,  clerks,  and  so  forth. 

242 


ORDERS—SERVICE  OR  STANDING  ORDERS      243 

The  first  class  of  expenditure  is  called  direct  or  productive 
expense,  the  second  class  is  called  indirect,  unproductive  expense, 
or  shortly — burden.  The  distinction  between  the  two  classes 
of  expenditure  is  perhaps  unduly  accented  by  the  use  of  these 
terms,  which  imply  that  one  kind  of  expense  is  in  some  way  more 
useful  or  legitimate  than  the  other.  In  a  well-managed  plant 
on  the  contrary  there  is  no  difference  between  the  value  of  the 
direct  expenditure  and  that  of  the  indirect  expenditure.  The 
only  difference  is  that  the  former  can  be  measured  directly  and 
simply  in  relation  to  the  quantity  of  work  carried  out  in  a  given 
time,  and  the  latter  requires  more  complex  methods  of  measure- 
ment and  connection  with  quantity  of  product. 

Every  man  and  every  dollar  of  expenditure  ranked  as  pertain- 
ing to  indirect  expense  or  burden  is  really  performing  service. 
And  in  a  well-managed  plant  every  item  of  such  service  will  be 
indispensable  service,  and,  therefore,  as  necessary  to  the  productive 
process  as  is  the  work  of  the  men  at  the  looms  or  vats  or  machine 
tools,  who  are  working  directly  on  salable  product.  As  a  matter 
of  fact  all  the  miscellaneous  activities  usually  found  throughout 
a  plant  can  be  reduced  to  a  few  well-marked  groups  of  service, 
so  that  the  apparently  heterogeneous  character  of  indirect 
expense  is  not  so  marked  as  it  often  appears. 

Now,  it  will  be  evident  that  in  a  plant  of  any  size  some  mechan- 
ism must  be  set  up  to  indicate  to  the  men  what  work  is  required 
and  what  portion  of  it  has  been  assigned  to  them,  and  further 
some  additional  mechanism  must  be  established  so  that  the  time 
they  spend  on  the  work,  the  material  they  use  on  it,  and  the 
cost  both  of  labor  and  material,  may  be  recorded  against  each 
job  or  lot  of  work  done.  And  further  still,  to  this  record  of  labor 
and  material  must  be  added  certain  other  expenses,  such  as 
depreciation,  rent,  insurance;  a  share  of  the  cost  of  supervision; 
a  share  of  the  cost  of  the  organization  of  timekeepers,  clerks, 
stenographers,  correspondents  and  so  forth.  These  necessities 
imply  first  an  order  system  and  secondly  a  cost  system.  The 
two  are  so  closely  connected  that  it  is  difficult  to  consider  one 
without  at  the  same  time  considering  the  other. 

The  prime  rule  in  regard  to  orders  is  that  no  work  may  be 
undertaken,  and  no  expenditure  within  the  shops  incurred,  save 
by  virtue  of  a  numbered  order. 

The  second  rule  in  regard  to  orders  is  that  no  wages  can 
be  paid  and  no  stores  issued  save  as  against  a  record  of  the 


MANUFACTURING  COSTS  AND  ACCOUNTS 

order  numbers  to  which  work  and  such  material  is  properly 
chargeable. 

The  third  rule  in  regard  to  orders  is  that  every  expenditure 
for  the  purpose  of  carrying  out  an  order  must  be  recorded  on  a 
such  Cost  Sheet  being  individual  to  that  order  and 
containing  nothing  but  expenditure  upon  that  order. 

Now,  as  has  already  been  pointed  out,  orders  fall  into  two 
principal  classes.  <  toe  class  is  that  of  Production  Orders,  and 
the  second  that  of  Service  Orders.  The  former  deal  with  those 
sses  performed  on  the  material  which,  later,  is  to  be  sold 
-oduct,  and  the  latter  deal  wuth  all  other  expenditures, 
liven  this  classification  is  subject  to  exceptions.  There  are  some 
operations  so  little  identifiable  with  particular  lots  of  work,  that 
though  performed  on  material  that  is  strictly  salable  material, 
yet  the  operations  are  more  of  the  nature  of  service  than  of  direct 
hiction.  Such,  for  example,  will  be  the  operations  of  anneal- 
ing, varnishing  in  vats,  tempering,  and  generally  any  operation 
in  which  a  number  of  separate  lots  of  goods  belonging  to  separate 
orders  are  worked  on  at  the  same  time  and  in  a  uniform  way. 
'  renerally  speaking,  however,  Production  Orders  are  those  issued 
for  performing  work   directly  on  salable  material,   and  Service 

<  frders  comprise  all  other  work. 

In  large  plants,  and  in  most  machine  shops,  the  term  salable 
material  needs  to  be  used  with  qualification.  Such  shops  make 
things  for  their  own  use,  usually  tools,  jigs,  patterns,  etc.;  but 
sometimes  actual  machines.  A  firm  will  also  sometimes  under- 
take building  operations  on  its  own  behalf.  Therefore,  a  Produc- 
tion Order  may  embrace  work  done  on  material  salable  either  to 
an  outside  customer  or  to  the  firm  itself.  In  this  case  the  firm 
is  its  own  customer,  but  that  does  not  affect  the  distinction 
already  drawn.  It  only  extends  its  scope  a  little.  Usually, 
however,  orders  of  this  class  are  not  referred  to  as  Production 

<  Orders,  bu1  as  Plant  <  Orders,  or  by  some  similar  term  to  indicate 
that  they  are  for  the  firm's  own  benefit.  In  the  present  work  they 
will  usually  be  termed  Plant  Addition  Orders. 

In   considering   orders   it    will   be  convenient  to  begin  with 

i vim:  Production  Orders  to  follow  later.     One 

>n  for  this  nut  hod  of  attacking  the  subject  is  that  ultimately 

all  the  expenditur<         3i  rvice  Orders  has  to  be  apportioned  in 

some  way  or  other  to  the  Production  Orders.     There  are  several 

of  doing  tin.-,  and  these  are  known  as  the  various  methods  of 


ORDERS— SERVICE  OR  STANDING  ORDERS      245 

burden  distribution.  We  need  not  note  more  than  their  existence 
at  this  stage.  From  what  has  been  said  already  it  will  be  readily 
understood  that  the  reason  for  distributing  all  the  cost  of  Service 
Orders  over  the  various  Production  Orders  is  that  only  the  latter 
Jetch  money.  They  alone  represent  salable  product,  and,  there- 
fore, in  order  that  service  may  be  paid  for,  it  must  at  some  time 
or  other  be  transferred  to  and  included  in  the  cost  of  salable  prod- 
uct, so  that  the  price  asked  for  the  latter  is  sufficient  to  cover  not 
only  the  direct  cost  of  the  product  but  also  its  share  of  service. 

One  of  the  great  sources  of  business  failure  is  neglect  of  cost 
of  service.  Where  no  proper  accounting  system  is  in  operation 
to  ensure  that  cost  of  salable  goods  does  actually  include  cost  of 
service  in  addition  to  direct  cost  of  production,  the  cost  of  service 
is  frequently  guessed  at,  and  not  infrequently  underestimated, 
with  a  resulting  loss  on  sale. 

Service  Orders  are  of  two  kinds:  Standing  Orders  and 
Special  Service  Orders. 

Standing  Orders  cover  all  the  usual  routine  service  operations. 
Special  Service  Orders  are  issued  where  some  unusual  operation 
must  be  undertaken,  such  as  the  general  repair  of  a  machine  or 
overhaul  of  a  building.  The  distinction  between  the  two  classes 
of  Service  Order  is  usually  one  of  magnitude.  The  limit  varies 
in  different  plants,  but  is  usually  based  on  an  understanding  that 
any  repair  or  other  service  work  likely  to  amount  to  more  than 
a  certain  sum,  say  $20,  must  be  authorized  by  a  Special  Service 
Order,  which  must  be  issued  or  signed  by  some  authorized  person. 
In  all  other  respects  the  two  classes  of  Service  Order  are  identical. 

Standing  Orders  are  so  named  because  they  are  permanent. 
That  is  to  say  that  they  represent  a  classification  of  the  usual 
kinds  of  service,  and  to  each  item  of  this  classification  a  permanent 
order  number  is  affixed,  so  that,  for  example,  if  the  letter  Q  is 
assigned  as  a  prefix  distinguishing  Standing  Orders,  Q35,  may 
represent  building  repairs,  Q36,  machine  repairs  and  so  forth. 
These  numbers  do  not  change.  Each  has  a  Cost  Sheet  appro- 
priated to  it,  and  the  costs  thus  ascertained  are  charged  into 
Burden  account  at  the  end  of  each  month,  leaving  the  sheet  blank 
to  receive  the  detail  of  the  next  month's  expenditure.  In  this 
way  though  the  numbers  never  change,  yet  virtually  each  month's 
expense  is  isolated  without  difficulty.  On  the  other  hand,  the 
system  of  Standing  Orders  ensures  that  expenditure  on  service 
is  recorded  in  the  same  way  month  after  month,  so  that  accurate 


246      MANUFACTURING  costs  AND  ACCOUNTS 

comparisons  can  be  made  as  to  the  expenditure,  in  very  consider- 
able detail,  and  with  a  minimum  of  trouble. 

The  object  of  setting  up  Standing  Orders  is  to  record  expendi- 
ture cu  service  so  that  the  record  is  significant.  It  is  of  no  use  to 
record  figures  unless  they  mean  something.  Now,  when  we 
have  a  great  variety  of  expenditure,  as  in  the  case  of  a  manu- 
facturing plant,  we  must  be  able  to  distinguish  between  the 
various  uses  of  the  service  performed,  or  the  figures  will  have 
little  significance.  If,  for  example,  we  know  that  in  a  given 
mouth  s.">. tKK)  has  been  spent  on  repairs,  this  tells  us  something, 
but  it'  we  think  the  figure  too  high  we  have  no  means  of  finding 
out  the  location  of  the  excess.  If,  however,  our  Standing  Orders, 
id  of  merely  providing  one  item  for  repairs,  had  provided 
rate  items  for  building  repair,  machine  repair,  repairs  to 
fixtures,  tool  repairs,  and  so  forth,  we  should  be  able  to  lay  our 
:•  on  the  division  in  which  the  increase  had  occurred.  And 
if  a  further  subdivision  had  been  provided,  so  that  each  depart- 
iii. -nt  had  a  set  of  Standing  Orders  for  its  own  expense,  we  should 
be  able  to  trace  the  increased  expenditure  on,  say,  machine 
repair,  to  the  particular  department  in  which  it  had  been  incurred. 
And  this  localization  of  the  increase  would  be  made  with  prac- 
tically no  more  work  than  would  be  involved  in  providing  the 
bare  information  that  repairs  as  a  whole  had  cost  $5,600. 

The  setting  up  of  a  system  of  Standing  Orders  is,  therefore, 
a  matter  of  considerable  importance,  and  the  degree  of  control 
'"  be  attained  over  expenditure  on  service  will  depend  largely 
on  the  wise  laying  out  of  the  Standing  Order  system. 

Though  in  particular  industries  there  may  exist  special  kinds 
of  service  expense,  yet  these  will  not  commonly  be  important. 
The  functions  underlying  manufacturing  activity  are  closely 
similar  in  all  industries,  and  some  such  scheme  as  will  now  be 
described  will  apply  to  almost  all  plants. 

It  will  have  been  understood  from  the  foregoing  chapters 
that  burden  is  made  upof  three  elements:  first,  material  consumed, 
such  as  oil.  waste,  fuel.  etc. — any  material,  in  fact,  that  does  not 
form  pari  of  the  salable  product;  secondly,  internal  service,  rep- 
resented  by  wages  and  salaries;  thirdly,  outside  service  repre- 
sented by  charges  for  rent,  insurance,  taxes,  etc.  And  it  will  be 
remembered  'hat  wear  and  tear  on  plant,  buildings,  machinery 
and  other  equipment  (which  is  really  a  slow  consumption  of 
material)  is,  in  practice,  charged  against  manufacturing  opera- 


ORDERS— SERVICE  OR  STANDING  ORDERS     247 

tions  by  means  of  a  depreciation  rate.  In  considering  these 
elements  of  expenditure  for  the  purpose  of  arranging  a  set  of 
Standing  Orders,  it  is  obvious  that  one  or  more  main  classifica- 
tions may  be  made,  according  as  we  look  at  the  facts  from  one 
or  another  viewpoint. 

In  laying  out  a  Standing  Order  system  so  as  to  collect  expense 
in  intelligible  forms,  the  first  and  most  obvious  necessity  is  to 
separate  the  expense  pertaining  to  one  department  from  that 
pertaining  to  another.  In  other  words  we  must  "depart- 
mentalize" expense.  We  must  ascertain,  as  shown  above,  what 
amount  has  been  spent,  say,  on  repairs,  in  each  department. 
But  it  is  also  desirable  to  be  able  to  view  expense  from  another 
angle,  and  collect  like  classes  of  expense  into  similar  groups  in 
each  department.  By  aggregating  these  departmental  groups, 
we  can  then  observe  the  total  expenditure  on  any  class  for  the 
whole  plant.  Thus,  to  take  a  simple  example,  we  may  isolate 
the  cost  of  cleaning  windows  in  each  department  by  assigning  a 
Standing  Order  number  to  that  particular  form  of  activity. 
This  enables  us  to  compare  the  cost  of  such  work  in  department 
1  with  the  same  work  in  other  departments.  It  also  enables  us, 
by  aggregating  the  cost  in  all  departments,  to  view  the  cost  of 
window  cleaning  as  a  whole.  Then  should  we  receive  a  bid  from 
a  window-cleaning  company  to  do  the  work  for  the  whole  plant 
at  a  fixed  rate  of  remuneration  we  are  enabled  to  see  at  once 
whether  such  offer  is  advantageous  or  not. 

Standing  Orders,  therefore,  are  provided  in  each  department 
to  take  care  of  all  the  different  kinds  of  service  activity  found 
in  each  such  department.  This  may  be  done  with  any  desired 
degree  of  detail.  But  if  each  department  is  dealt  with  singly, 
it  might  happen  that  comparison  between  one  department  and 
another  would  be  difficult.  Therefore,  it  is  usual  to  lay  out  a 
scheme  of  numbers  so  that  each  hundred,  for  instance,  represents 
a  department.  Thus,  numbers  100  to  199  may  represent  the 
power  plant,  200  to  299  the  first  operating  department,  say  the 
machine  shop,  300  to  399  the  second  operating  department,  say 
the  foundry,  and  so  forth. 

Within  each  department,  similar  items  are  numbered  similarly, 
thus  sweeping  and  cleaning  may  be  108  in  the  power  plant,  208 
in  the  machine  shop,  308  in  the  foundry,  and  so  on.  It  is  evident 
that  a  cross-totaling  of  the  08  items  will  give  us  a  total  of  cost 
of  sweeping  and  cleaning  throughout  the  entire  plant. 


248      MANUFACTURING  COSTS  AND  ACCOUNTS 

While  this  method  gives  useful  information,  it  is  desirable 
that  the  detail  items  themselves  shall  be  grouped  in  such  a  way 
that  the  cost  of  certain  large  groups  of  service  shall  be  known, 
both  within  each  department  and  in  the  aggregate.  Thus, 
for  example,  the  group  of  expense  connected  with  buildings,  their 
repair  and  maintenance,  lighting  and  heating,  is  obviously  a 
clear-cut  held  of  activity  that  should  be  separated  from  all 
others.  In  the  same  way,  the  cost  of  keeping,  storing,  convey- 
ing and  handling  material  throughout  the  plant  forms  another 
field  of  activity  of  a  separate  nature.  The  cost  of  supervision 
is  another  such  group.  The  cost  of  factory  organization,  that 
is,  of  offices,  clerks,  office  appliances,  stationery,  blanks  and 
books  i-  another.  And  finally,  we  have  the  cost  of  auxiliary 
service  departments  such  as  the  power  plant,  compressed-air  or 
hydraulic  plants,  etc.,  which  must  be  first  ascertained  sep- 
arately and  then  prorated  on  some  adequate  basis,  to  the  pro- 
duct ive  departments  making  use  of  the  power. 

It  is,  therefore,  not  sufficient  to  simply  list  all  the  service 
activities,  and  give  them  similar  numbers  in  the  various  de- 
partments (varying  only  as  to  the  hundred  figure).  The  items 
themselves  should  be  arranged  in  a  certain  order,  so  that,  for 
instance,  nil  the  items  relating  to  buildings  are  together,  all  those 
relating  to  stores  and  transport  of  materials  are  also  together 
and  so  on.  It  may  happen  in  some  cases  that  certain  depart- 
ments have  one  or  more  items  peculiar  to  themselves.  A 
foundry,  for  example,  will  have  certain  activities  such  as  "chip- 
ping" or  "fettling"  requiring  separate  listing.  A  power  plant 
will  have  other-,  as,  for  example,  "ash  removal."  And  it  may 
further  happen  that  some  departments  may  lack  activities 
generally  found  in  others,  as,  for  example,  a  department  having 
no  windows  could  not  have  an  item  relating  either  to  the  repair 
or  the  cleaning  of  windows,  but  in  general  this  will  not  affect 
the  scheme.  Where  activities  are  absent,  the  corresponding 
number  is  simply  omitted.  On  the  other  hand,  where  extra 
activities  an-  in  question,  care  must  be  taken  not  to  omit  them 
in  laving  out  the  scheme,  as  otherwise  no  vacant  space  may 
.n  the  series  of  numbers  at  the  proper  place,  and  we  may 
to  resort  to  the  inconvenience  of  using  numbers  like  106a, 
etc.  which  would  easily  lead  to  confusion  and  error. 

The  groups  into  which  items  are  collected  are  known  as  "pro- 
duction factor-."'     They  are  at  leasl  six  in  number,  as  follows: 


ORDERS— SER\  'ICE  OR  STANDING  ORDERS      249 

Buildings  (or  space)  factor. 

Stores-transport  factor. 

Supervison  factor. 

Organization  factor. 

Power  factor. 

Productive  machinery  factor. 
In  some  cases,  as  indicated  above,  there  may  be  more  factors  than 
these.  There  may  be,  for  example,  more  than  one  kind  of  power 
factor,  and  in  the  case  of  machine  shops  there  may  be  a  separate 
tool  room  factor,  the  cost  of  which  must  be  prorated  to  certain 
of  the  productive  departments  just  as  the  power  factors  have 
ultimately  to  be  prorated. 

As  we  have  nothing  to  do  at  this  stage  with  the  way  in  which 
these  items  are  charged  to  Production,  but  are  only  concerned 
here  with  their  collection  in  convenient  form,  it  will  be  sufficient 
to  exhibit  a  skeleton  scheme  of  Standing  Orders,  arranged 
in  the  above-mentioned  manner.  Fig.  56  shows  such  a  scheme, 
which,  of  course,  is  intended  to  be  merely  suggestive.  It  will 
require  modification  and  addition  according  to  the  nature  of 
the  business,  and  the  particular  local  circumstances  of  the  plant. 
In  general,  however,  it  will  be  pretty  widely  applicable. 

It  should  also  be  noted  that  an  extension  of  the  Standing  Order 
scheme  may  readily  be  made  to  indicate  specific  items  of  equip- 
ment worked  on  in  the  way  of  repairing.  Thus  560  represents 
the  repair  of  productive  machinery  in  department  5.  Now,  as 
each  machine  or  piece  of  equipment  should  be  numbered,  as 
explained  in  a  former  chapter,  it  is  an  easy  matter,  if  machine 
number  203  has  been  repaired,  to  write  the  Standing  Order  num- 
ber thus ;  560/203.  This  not  only  identifies  the  class  of  work  that 
has  been  performed,  namely,  repairs  to  machinery,  and  the  de- 
partment in  which  it  has  been  done,  namely,  department  5,  but 
also  specifically  identifies  the  machine  so  repaired,  namely,  No. 
203.  It  should  be  mentioned  here  that  the  use  of  a  decimal  point 
instead  of  a  stroke,  thus  560.203  is  frequently  recommended  in 
connection  with  schemes  of  this  kind.  There  is  no  advantage 
whatever  in  such  a  practice,  and  it  tends  to  surround  with  an 
appearance  of  mystery  what  is  really  very  simple.  To  talk 
about  decimal  points  confuses  many  persons,  whereas  almost 
anyone  can  grasp  the  idea  that  the  Standing  Order  number  must 
be  followed  by  the  machine  number,  separated  by  a  stroke. 


250      MANUFACTURING  costs  AND  ACCOUNTS 


u 

u 

- 

of  Expense 

air 
to 

C3 
-J    "H 

a.  u 

«    % 

o 

ft. 

Q    o 

D.     3 
(3L| 

O    -3 

a  s 

'--    - 

U  -rj 

Q  g 

o 

i  1 

a  - 

3 

Depreciation  of  Building  tto       :•: 

100 

200 

300 

400 

500 

BOO 

700 

800 

01 

I. iic;.  Insurance  on  Bldgs  ic     :£ 

101 

201 

301 

401 

501 

001 

7nl 

801 

02 

Rejalrs  to  Buildlnr,  Structure 

102 

202 

302 

402 

502 

002 

702 

302 

03 

Repair?  to  Building  Equipment        ^*: 

103 

203 

303 

4":: 

503 

003 

703 

803 

04 

Current  for  Lighting 

1  14 

204 

304 

404 

504 

004 

704 

804 

05 

Steam  for  lleatln: 

105 

205 

305 

403 

505 

B05 

705 

805 

00 

Painting  L  Kalsominlng 

106 

206 

300 

40G 

506 

GOG 

700 

80S 

07 

Cleaning  Windows 

107 

207 

307 

407 

507 

607 

707 

M'7 

03 

Other  Sweeping  A  Cleaning 

103 

208 

308 

403 

508 

G03 

70S 

SnS 

Bondrj  Supplies 

100 

200 

300 

400 

509 

009 

709 

809 

t 

o  ; 

:-  B 

a  2 

- 

2a 

09 

20 

Depreciation  On  Cranes,  Trucks,  Fixtures  io 

320 

520 

020 

720 

820 

. 

Insurance  on  Ditto 

321 

521 

621 

721 

821 

22 

Repairs  to  Ditto 

322 

522 

622 

722 

822 

27 

Ware;  of  Crani-men  &  Handlers 

327 

527 

027 

727 

827 

23 

Salaries  Storekeepers  &  Storeclerks 

328 

6undrr  Supplies 

320 

529 

029 

729 

829 

a 

.-  - 
'-.I 

30 

Wages  of  Foreman 

430 

53G 

G3G 

736 

830 

37 

Share  of  Adminis,  Salaries 

137 

38 

Salaries  of  Bupt  h  Production  Staff 

133 

a 
o 

a  •> 
J2  £ 
a 

So 

O  5 

- 

s 

40 

Depreciation  on  Office  Equipment 

140 

240 

340 

140 

41 

Insurance       '»        "            " 

141 

241 

341 

441 

42 

Repairs  to                ••            " 

142 

242 

342 

442 

44 

Stationer;,  Books  &  Blanks 

144 

244 

344 

444 

45 

Telephone,  Telegrams  &  Postages 

145 

245 

345 

445 

47 

Wages  of  Messengers,  Watcbuu-n  4c 

147 

247 

347 

43 

Salaries  of  Clerks 

143 

243 

348 

40 

Bun  !rj  Supplies 

140 

249 

340 

440 

a  | 

- 

50 

Lon  on  Power  Equipment 

450 

550 

650 

750 

850 

51 

Insurance       ••         •  *              m 

451 

351 

051 

751 

851 

52 

Repair:  to  Power  Equipment  In  Power  ; 

452 

53 

»■       "       "              "        elsewhere 

553 

053 

753 

853 

54 

Fuel 

454 

55 

Feed  Water 

155 

57 

Waie.  In  Power  Plant.  Boilers 

457 

58 

"       Eurlncs  tc 

458 

'  1 

cs,  ft  etc 

450 

539 

650 

750 

859 

J:  b 

00 

Depredation  on  Martinet  &  Bcnehes 

500 

i,i, 

7>," 

■Ml 

t  c  = 

01 

1     ■     '     ■     e 

501 

601 

701 

861 

02    Uremic 

502 

002 

762 

862 

C'ulni  I  Oilier  Machines, 

503 

663 

7U3 

i;:t 

itlng,  Ventilating  A;  Fire  Equipment 
o  Standing  O-  :  .rc  given     Che  Item  of  Expense  docs  not  usually  ariso 

J  [Q.  56.— Principal  iten  iry  Expense  tabulated  as 

uding  Orders". 


ORDERS— SERVICE  OR  STANDING  ORDERS      251 

Moreover,  strokes  are  much  less  likely  to  become  blurred  or 
erased  than  dots. 

In  engineering  works  the  drafting  room,  and  the  tool  room  will 
in  general  require  separate  extensions  for  their  special  activities, 
both  these  departments,  like  the  power  department,  being  of  the 
nature  of  expense,  and  having  ultimately  to  be  prorated  over 
productive  departments  in  order  to  extinguish  their  cost.  All 
departments  that  make  nothing  for  sale,  but  are  simply  auxiliary 
aids  to  productive  work,  will  be  dealt  with  along  similar  lines. 

The  Standing  Order  scheme  has  for  its  main  object  to  collect 
and  classify  all  activity,  and  consequently  all  expenditure  within 
the  factory  that  is  not  directly  connected  with  actual  work  on 
product.  It  is,  therefore,  often  called  indirect  expense.  In 
many  industries,  this  indirect  expense,  as  collected  through 
Standing  Orders,  when  added  to  certain  other  items  such  as 
depreciation,  rents,  insurance,  etc.,  forms  more  than  half  the 
total  shop  cost  of  production.  It  forms,  therefore,  a  very  im- 
portant element  in  the  successful  running  of  a  shop,  and  as  will 
be  seen  later,  an  imperative  necessity  exists  for  ascertaining  the 
amount  chargeable  against  each  Standing  Order  number,  each 
day,  and  for  promptly  bringing  it  to  the  attention  of  the  foreman 
and  others  concerned  in  the  arrangement  of  work.  For  this 
reason  whatever  detailed  subdivisions  are  made,  should  be  made 
in  consultation  with  the  technical  force,  so  that  the  daily  in- 
formation to  be  extracted  from  costs  will  be  of  real  service  to  the 
shop  officials,  enabling  them  to  exercise  effective  control  over 
expense. 

In  some  cases  as  has  already  been  pointed  out,  the  Standing 
Orders  are  limited  in  scope.  This  chiefly  applies  in  the  case  of 
repairs.  Many  establishments  make  it  a  rule  to  require  a  signed 
special  order  before  repair  work  of  more  than  $20  in  value  is  put 
in  hand.  In  such  cases  a  special  series  of  orders  is  sometimes  made 
use  of,  which  may  be  simple  numbered  blanks,  on  which  is  written 
particulars  of  the  work  to  be  done.  One  copy  is  kept  by  the 
official  authorizing  the  work,  one  sent  to  the  cost  department, 
and  one  to  the  foreman  supervising  the  job.  When  the  job  is 
finished  the  cost  department  is  advised,  and  the  cost  of  the  work 
is  then  transferred  to  the  proper  Standing  Order  number.  In 
some  cases  it  will  suffice  to  issue  the  signed  order,  but  to  charge 
the  work  to  the  usual  Standing  Order  number.  The  only  object 
of  a  separate  order  is  to  ascertain  the  cost  of  the  special  job, 


252      MANUFACTURING  COSTS  AND  ACCOUNTS 

apart  from  the  normal  expense  going  against  the  order.  In 
engineering  works,  a  separate  order  number  series  will  in  general 
Ivisable.  In  other  kinds  of  plant,  identification  of  the 
time  and  material  on  a  special  job  will  usually  be  possible  without 
recourse  to  this  device. 

In  laying  out   a  scheme  of  Standing  Orders,  then,  the  first 

requisite  is  to  assign  a  series  of  hundreds  or  it  may  be  thousands 

among  1  he  different  departments,  so  that  say  the  500  series  repre- 

-  the  "polishing"  shop,  or  the  "kettle"  room,  or  the  "wood 

men1  or  the  "foundry"  as  the  case  may  be,  and  then 

to  ascertain  what  activities  are  common  to  all  departments.     In 


Group 

Item  of  Expense 

Dept. 
9 

Dept. 
10 

.'.ion  on  Equipment 

^)L 

980 

S 

B      - 
u 

a 

,, 

~~ (| 

981 

Repairs       to 

(7 

982 

Salaries  of  Engineers  &  Draftsmen 

_]) 

984 

of  Tracers,   Printers  &c 

I! 

985 

i'rint  &  Pboto  Supplies 

\\ 

9SG 

Dra!                                        .  ;.:ies 

[ 

987 

- 
- 

Depreciation  on  Equipment 

3c 

1090 

Insurance  on  Equipment 

U 

1091 

Bepairs  to  Equipment 

_/) 

1092 

of  Toolkeepers 

ll 

1093 

Wages  of  Toolboys  &  Messengers 

[j 

10'JI 

Tool  Breakages 

=]{== 

1095 

3C 

\\ 

E      asion  of  Standing  Order  Chart  to  include  special  expenses  of 
drafting  and  tool  rooms. 

general  these  activities  should  be  grouped  by  production  factors, 
Buch  as  the  buildings  (or  space)  factor,  the  stores-transport  factor, 
the  power  factor  and  so  forth.     Then  having  arranged  these  in 

with  suitably  subdivided  details,  the  numbers  from  1  to  69 

ed  to  them,  so  that  when  prefixed  by  the  hundred  figure 

indicating  the  department,  the  particular  activity,  say  building 

r  i"  floor,  will  be  Known  ;is  applying  to  that  department. 

Further,  I  hose  depart  ments  which  are  auxiliary  to  the  productive 

departments,  Buch  as  a  tool  room  and  whose  activity  is,  therefore, 

of  the  nature  ol  musi  have  their  special  activities 

tabulated,  and  the  numbers  from  70  to  99  assigned  to  them. 


ORDERS— SERVICE  OR  STANDING  ORDERS      253 

By  this  means,  if  we  see,  for  example,  Standing  Order  No.  452, 
we  shall  know  at  a  glance  that  it  refers  to  some  special  activity 
in  department  4,  and  as  we  know  that  department  4  is  the  power 
house,  we  shall  quickly  be  able  to  ascertain  that,  in  fact,  it  means 
labor  employed  on  repairs  to  machinery  in  the  power  house. 
In  the  same  way  we  might  have  1,093  representing  some  kind  of 
work  in  department  10,  and  if  10  were  a  tool  room,  further  refer- 
ence would  disclose  that  1,093  was  labor  of  tool  attendants,  who 
issue  and  receive  tools  from  the  tool  stores. 

If  great  subdivision  were  desired,  more  than  100  numbers  would 
be  required  for  each  shop.  In  such  cases,  rather  than  use  the 
numbers  100  to  299  for  department  1,  it  is  very  much  better  to 
allot  each  department  a  complete  1,000  numbers.  Department  1 
would  then  take  the  numbers  1,000  to  1,999,  department  2,  those 
from  2,000  to  2,999  and  so  forth.  Numbers  cost  nothing,  while 
the  gain  from  having  easily  recognizable  groups  identified  with 
each  shop  is  very  great. 

It  must  be  understood  that  the  Standing  Orders  applying  to 
productive  departments  collect  only  such  items  as  are  directly 
chargeable  to  such  departments.  Thus,  for  example,  there  will 
be  in  each  productive  department,  Standing  Orders  representing 
wages  (see  523,  623,  etc.  in  above  table)  chargeable  against  stores- 
transport  factor.  These  will  represent  the  local  cost  of  handling 
stores  and  finished  parts.  In  light  industries  these  will  be  chiefly 
wages  of  truckers,  laborers  and  so  forth.  In  heavy  industries 
they  will  represent  the  wages  of  cranemen.  Additional  numbers 
serve  to  record  the  cost  of  repairing  cranes,  oil  and  supplies  for 
same.  Also  it  may  happen  that  subsidiary  stores  for  half-finished 
parts  may  be  set  up  for  the  service  of  a  particular  department. 
Such  expense  will  be  part  of  the  Stores-transport  Standing  Orders 
of  that  department. 

But  this  will  still  leave  a  considerable  amount  of  expense 
chargeable  against  the ,  main  stores  department  itself.  This 
expense  will  include  the  cost  of  upkeep  of  the  building,  wages 
and  salaries,  stationery,  repairs  to  fixtures,  etc.  These  expenses 
will  be  collected  under  a  department  classification,  say,  depart- 
ment 3  in  the  table  above.  Similarly,  the  local  expense  of  the 
power  plant  will  be  collected  under,  say,  department  1  in  the  table. 
When  all  the  expense  of  running  such  departments  (which  are 
non-productive  departments)  must  be  prorated  over  the  actual 
productive  departments. 


254      MANUFACTURING  COSTS  AND  ACCOUNTS 

In  the  case  of  power  plant  department  this  will  be  effected  on 
the  basis  of  the  amount  of  power  judged  (or  measured)  as  being 
y  each  productive  department.  In  the  case  of  other 
non-productive  departments,  the  prorating  is  made  on  some  arbi- 
trary percentage,  which  is  fixed  by  the  management  after  due 
consideration  of  all  the  circumstances  of  the  case.  In  some 
plants,  the  expense  of  running  the  stores  department  is  not  pro- 

;  to  productive  departments  but  is  added  as  a  percentage 
hi  the  cost  price  of  stores  issued  during  the  month.  This  is  a 
practice  that  is  allowable  in  some  cases,  but  needs  to  be  adopted 
with  caution,  especially  where  costly  material  is  handled  along- 
side cheap  material.  The  cost  of  handling  the  one  is  probably 
in  mosl  cases  no  greater  than  that  of  handling  the  other,  but  this 
method  naturally  tends  to  penalize  the  more  expensive  material 
and  lets  the  cheaper  kind  off  too  lightly.  A  case  may  be  men- 
tioned where  a  heavy  steel  casting  that  had  never  been  in  the 

-  .it  all,  but  had  passed  from  the  delivery  team  direct  to  the 
machine,  had  picked  up  a  heavy  stores  charge,  out  of  all  propor- 
tion to  its  merits,  simply  because  it  happened  to  have  been  made 
of  an  expensive  alloy  for  a  special  purpose. 

The  object  of  Standing  Orders,  therefore,  is  to  collect  items 
of  expense  chargeable  against  all  departments  of  the  factory, 
whether  such  departments  are  productive  or  non-productive 
and  then  when  all  are  collected,  the  amounts  standing  against  the 
non-productive  departments  are  prorated  on  some  approved  basis 

the  productive  departments.  This  applies  whatever  the  clas- 
sification adopted  for  the  Standing  Orders.  It  is  not,  of  course, 
essentia]  to  group  the  items  by  production  factors  as  shown  in 
the  table.  But  as,  in  general,  the  items  must  be  collected  in  some 
way  or  other,  it  is  best  to  so  arrange  them  that  they  are  grouped 
so  thai  the  cosl  of  differenl  kinds  of  service  is  isolated.  That 
thai  the  cost  of  maintaining  and  running  buildings 
i-  a  natural  group  thai  should  be  kept  separate,  and  so  with  the 

:  production  factors. 


CHAPTER  XIII 
ORDERS— PRODUCTION    ORDERS 

Production  Orders  cover  all  activities  performed  on  salable 
material.  Expense  on  Production  Orders,  whether  of  material 
or  labor  is  usually  termed  direct  expense  to  distinguish  it  from 
expenditure  on  Standing  Orders,  as  explained  in  the  previous 
chapter. 

Production  Orders  vary  very  much  in  character,  according  to 
the  type  of  industry.  In  some  industries,  the  Production  Order 
system  is  elementary,  perhaps  two  or  three  being  issued  in  a 
month.  In  other  industries,  notably  all  kinds  of  engineering 
industries,  the  order  system  is  elaborate  and  complex.  It  will 
be  well  to  consider  the  reason  of  these  differences  at  the  outset. 

If  our  industry  is  a  "continuous"  one,  such  as  paper-making  or 
soap-making,  and  if  we  have  one  chain  of  machines  or  depart- 
ments, each  performing  some  specific  work  on  a  perfectly  uniform 
product,  then  it  is  obvious  that  there  is  very  little  scope  for  an 
order  system.  As  Production  Orders  are  a  device  for  identifying 
specific  items  of  product,  and  as  in  this  case  one  part  of  our  prod- 
uct is  absolutely  identical  with  every  other  part,  there  is  no  need 
for  any  order  system,  unless,  indeed,  our  statement  of  monthly 
production  were  for  convenience  considered  as  an  order,  each 
month's  product  being  charged  to  a  separate  serial  order  number. 

But  if  not  one,  but  two,  products  were  in  question,  say,  for 
example,  two  varieties  of  soap,  and  if  our  machines  were  now 
occupied  on  one  kind  and  now  on  another,  then  the  desirability 
of  instituting  an  order  system  would  make  itself  felt.  To  obtain 
correct  costs,  it  would  be  advisable  to  record  the  time  occupied 
by  each  batch  of  soap  as  it  passed  through  the  machines,  so  that, 
the  cost  of  operating  could  be  divided  between  the  two  products  in 
proportion  to  the  time  occupied  by  each.  And  this  cost  divided 
by  the  respective  weights  of  soap  produced  on  each  order  would 
be  the  cost  of  the  soap  per  pound. 

The  next  case  we  may  consider  is  one  where  the  product  is 
uniform  as  regards  substance,  but  individual  as  regards  weight. 

255 


MANUFACTURING  COSTS  AND  ACCOUNTS 

Such  a  case  is  observable  in  a  foundry.  The  same  mixture  of 
metal  may  be  running  all  the  time,  but  quite  a  number  of  different 
articles  may  becasl  from  it.  In  such  a  case  each  individual  batch 
would  be  distinguished  by  a  separate  order  number,  and  if  the 
produd  on  each  order  number  were  weighed,  we  should  find  the 
cost  of  the  order  by  simple  division  into  the  total  cost  of  output  of 
the  foundry  for  the  day. 

But  it  might  also  happen  in  the  case  of  the  foundry  that  more 
than  a  difference  of  weight  was  involved  as  between  one  order  and 
another.  It  might  happen  that  one  kind  of  work  required  longer 
to  mold,  perhaps  also  more  skilled  molding  than  another.  Here 
is  an  additional  reason  for  identifying  each  separate  kind  of  work 
by  an  order  number.  The  molders,  instead  of  having  their  wages 
thrown  into  a  common  fund  of  foundry  cost,  wrould  charge  their 
time  directly  to  order  numbers,  so  that  the  individual  differences 
-t  of  molding  would  be  charged  against  each  separate  order. 

Finally,  we  may  consider  the  case  of  an  engineering  shop. 
we  may  receive  an  order  from  a  customer  for  a  complete 
machine.  This  machine  may  contain  hundreds  of  separate  parts. 
These  parts  may  originate  in  different  ways.  Some  may  be  cast, 
others  forged  from  bar  or  bloom,  some  may  be  cut  off  from  solid 
rod,  some  may  be  made  from  sheet  metal,  while  others  again  may 
be  formed  of  wire.  And  on  each  of  these  original  pieces,  all  sorts 
of  operations  may  be  performed.  The  casting  or  forging  may  be 
drilled,  milled,  planed,  slotted,  turned,  filed;  the  piece  from  the 
rod  may  be  worked  up  in  an  automatic  machine,  the  sheet  may  be 
spun  or  ] tressed  into  shape  or  punched  and  bent,  the  wire  may  be 
coiled  or  straightened  and  so  forth. 

An   endless   variety   of  shapes  and  sizes  of  many   kinds  of 

materials  will  be  the  results  of  the  shop  activities,  and  all  these 

-    have   then    to   be   fitted   together   with   great   accuracy 

and    the   resulting    machine   tried   and      tested   out   before   the 

tner'e  order  can  be  considered  as  complete. 

Now.  it  would  be  quite  possible  to  perform  all  this  activity  to 
a  single  order  number,  without  any  subdivision.  By  that  means 
lould  know  the  cost  of  the  machine,  and  as  we  know  what  we 
Bold  il  for,  we  should  also  know  whether  or  not  we  had  made 
a  profit.  Bui  supposing  thai  after  all,  it  was  found  that  we  had 
not  made  a  profit,  bul  a  loss  instead.  What  should  be  done  to 
discover  the  reason  for  the  loss? 

■  little  could  be  done.     The  cost  would  be  an  inextricable 


ORDERS— PRODUCT  I  OX  ORDERS  257 

jumble  of  material  of  all  kinds,  and  of  operative  labor  of  all  kinds, 
to  say  nothing  of  burden,1  and  no  amount  of  study  of  it  would 
tell  us  anything  definite  or  satisfactory.  The  need  for  a  compre- 
hensive and  detailed  system  of  Production  Orders,  enabling  us  to 
ascertain  the  cost  of  each  part  or  component  of  the  machine, 
would  be  forced  on  us.  And  probably  we  should  not  be  satisfied 
even  with  this.  We  should  also  require  to  know  the  separate 
cost  of  each  process  or  operation  on  each  dissimilar  piece.  Thus, 
if  the  baseplate  were  in  question,  we  should  want  to  know  the 
cost  of  the  metal  contained  in  it,  the  cost  of  molding,  the  total 
foundry  cost;  the  cost  of  planing,  drilling  the  holes,  slotting  and 
scraping  the  slides,  and  whatever  other  operations  were  performed 
on  the  baseplate,  each  separately.  Only  by  doing  so,  and  by  being 
in  a  position  to  contrast  such  detail  costs  with  the  cost  of  similar 
pieces  done  on  a  previous  occasion  could  we  conduct  our  business 
intelligently  and  safely. 

But  in  the  case  of  such  a  machine,  we  should  still  want  some 
simple  and  effective  method  of  viewing  the  cost  of  the  detailed 
processes  and  of  the  material  used  as  a  single  group.  In  other 
words  though  we  want  great  detail,  we  also  want  the  detail  of 
this  order  kept  entirely  separate  from  the  detail  of  other  orders. 
Some  method  must,  therefore,  be  devised  of  identifying  the  order 
as  a  whole  and  also  of  identifying  the  details  as  well. 

This  is  effected  by  issuing  a  Production  Order  for  the  whole 
machine,  and  Job,  Piece,  or  Component  Orders  for  the  individual 
parts  and  processes.  This  nomenclature  is  by  no  means  univer- 
sally adopted.  Sometimes  the  Production  Order  is  called  a 
Work  or  Works  Order.  Component  Orders  are  often  called  Part 
Orders.  But  by  whatever  names  they  may  be  known,  the  rela- 
tion of  the  subsidiary  order  to  the  main  order  is  always  the  same. 
The  Production  Order  covers  all  the  work  of  whatever  kind,  but 
no  specific  work;  the  Component  Order  is  the  specific  instruction 
to  someone  to  do  specified  kinds  of  work  on  a  specified  piece  of 
material. 

It  will  be  seen,  therefore,  that  Production  Orders  are  of  two 
kinds,  those  dealing  with  total  lots,  batches  or  outputs,  known 
as  Production  Orders,  and  those  dealing  with  subdivisions  of 
such  lots,  batches  or  outputs,  known  as  Component  Orders,  or 
Part   Orders.     It  also  will  be  evident  that  not  all  industries 

1  This  is  not  an  imaginary  case.  The  writer  has  met  engineering  cost 
records  kept  in  exactly  that  way. 

17 


258      MANUFAi  TURING  COSTS  AND  ACCOUNTS 

require  their  Production  Orders  subdivided  into  Component 
Orders,  since  detail  such  as  is  set  up  by  Component  Orders  is 
not  always  required. 

There  is  also  an  intermediate  class  of  Production  Orders  known 
as  Departmental  Orders,  which  stand  midway  between  Produc- 
tion Orders  and  Component  Orders.  In  many  plants  it  is 
considered  necessary  to  manifold  the  whole  or  part  of  the  Pro- 
duction Order  and  to  send  the  complete  or  partial  instruc- 
tions to  all  th<>  separate  departments  concerned  in  the  produc- 
tion of  that  order.  By  partial  instructions  is  meant  that  only 
such  details  as  interest  particular  departments  are  sent  to  those 
departments.  The  complete  Production  Order  is  in  fact  dis- 
■',  and  the  information  conveyed  on  it  is  distributed  among 
the  various  departments  concerned.  The  difference  between  a 
1  )epartmental  ( >rder  and  a  Component  Order  is  that  the  latter  is 
commonly  confined  to  the  work  on  one  kind  of  component, 
while  a  Depart  mental  Order  may  be  concerned  with  many  such 
components,  but  only  with  those  actually  worked  on  within  the 
department.  It  will  be  understood,  therefore,  that  Departmental 
Orders,  in  many  cases,  require  further  splitting  up  into  Com- 
ponent <  >rders  so  that  production  may  be  set  in  motion. 

From  the  accounting  viewpoint  the  main  thing  to  be  observed 
i  the  system  of  issuing  numbered  Production,  Department 
and  ( Jomponent  Orders  controls  the  form  in  which  the  cost  data  will 
ultimately  be  obtained.  With  the  form  of  orders  as  controlling 
the  efficiency  of  production  we  have  nothing  to  do  here.  The 
degree  in  which  subdivision  of  labor  is  necessary  is,  of  course,  a 
purely  technical  matter,  bnt  wherever  labor  is  subdivided  the 
mtant  should  be  ready  and  able  to  produce  figures  showing 
the  detail  cosl  of  the  subdivisions. 

Fortunately,  a  very  detailed  order  system  does  not  imply  a 
correspondingly  complex  accounting.  In  cost  work  a  great 
amount  of  identification  of  individual  work  with  particular  jobs 
and  orders,  is  obtained  as  a  byproduct  as  it  were.  Thus,  for 
pie,  if  we  have  five  departments,  and  each  Production  Order 
i-  -plit  up  into  live  1  )ep,i it  mental  Orders,  it  does  not  follow  that 
■quire  five  separa  of  numbers  for  such  orders.     On 

the  contrary,  if  the  number  of  the  original  Production  Order  is, 
hen  this  same  number  will  appear  on  each  Depart- 
mental Order,  and  time  will  be  charged  to  it  in  each  department, 
without  any  confusion  arising,  because  the  records  of  time  will 


ORDERS— PRODUCTION  ORDERS  259 

be  made  in  such  a  way  (as,  for  example,  by  each  department  hav- 
ing a  different  colored  Cost  Sheet)  that  it  will  be  evident  at  a 
glance  which  department  is  concerned.  Similarly,  if  we  have  a 
Component  or  Part  Order  calling  for  several  operations  on  the 
part,  it  is  not  necessary  to  have  a  separate  number  for  each 
operation,  as  the  nature  of  the  time  record  will  disclose  what  kind 
of  work  is  being  done,  so  that  it  is  easy  to  separate  and  classify 
each  operation,  and  obtain  the  cost  of  it,  even  though  several 
different  operations  have  been  charged  to  the  same  Component 
Order  number. 


Production 

Order   No 

Pnr 

Shipping 

Wanted  hy 

Customer 

Their  Order  No 

Date 

Kill  of  Material 

Job  Schedule 

Tool  Schedule 

Pattern-Schedule 

Special  Instructions 

= — -=r ■ - = -r 

Fig.  58. — Production  Order  (manifolded). 

In  general,  therefore,  we  shall  have  two  series  of  numbers  to 
take  care  of — one  series  pertaining  to  Production  Orders  and 
Departmental  Orders,  and  the  othpr  pertaining  to  Component 
or  Part  Orders.  Any  desired  amount  of  detail  in  cost  can  be 
obtained  from  these  two  series. 

Production  Orders  are  frequently  of  two  kinds,  those  arising 
from  orders  received  from  customers,  and  those  giving  instruc- 
tions for  the  manufacture  of  articles  for  stock.  From  the  account- 
ing viewpoint  no  difference  in  procedure  is  involved  as  between 
these  two  classes  of  orders. 


260      MANUFACTURING  COSTS  AND  ACCOUNTS 

The  form  of  Production  Orders  necessarily  varies  in  different 
industries.  In  some  a  few  lines  of  information  convey  all  there 
is  to  be  said  about  any  order.  In  others  a  considerable  amount 
of  written  information  has  to  be  inserted.  Fig.  58  shows  one 
form  of  Production  Order,  which  can  be  used  either  for  cus- 
tomer's orders  or  for  stock  orders.  In  many  plants  all  informa- 
tion about  the  destination  of  the  order  is  in  fact  suppressed  on 
the  copies  that  go  to  the  manufacturing  departments,  so  that 
the  shops  arc  in  ignorance  whether  they  are  working  on  customer's 
or  stock  orders. 

The  essential  elements  of  a  Production  Order  are  (1)  informa- 
tion as  to  the  goods  to  be  made.  This  information  may  be  sim- 
ple reference  to  some  standard  goods  made  by  the  firm,  or  it 
may  be  a  lengthy  description  and  require  supplementing  by 
elaborate  specifications,  blue  prints  and  so  forth.  (2)  The  date 
at  which  the  goods  are  to  leave  the  factory.  (3)  Spaces  for  en- 
try of  check  marks  signifying  that  the  necessary  Bill  of  Material 
where  such  is  in  use)  the  necessary  Part  Orders,  and  the  neces- 
sary Tool  Schedule  (where  special  tools  have  to  be  made  for  the 
work)  and  Pattern  Schedule  have  been  put  in  hand.  (4)  Partic- 
ulars as  to  the  customer,  his  order  number,  shipping  instruc- 
tions, etc.,  where  the  order  is  not  for  stock.  (5)  Space  for  special 
notes  and  instinct  ions,  as,  for  example,  where  special  attention 
has  to  be  paid  to  some  point  where  satisfaction  has  failed  to  be 
given  on  a  previous  occasion,  or  where  some  extra  finish  or  other 
unusual  condition  may  lie  emphasized. 

The  manifolding  of  Production  Orders  is  a  matter  depending 
on  the  internal  organization  of  the  plant,  and  its  extent.  One 
copy  is  retained  by  the  order  clerk,  one  should  be  sent  to  the 
accountanl .  one  to  the  shipping  clerk  or  the  warehouse  clerk, 
and  other  copies  to  the  various  departments  concerned  in  making 
the  goods.  Whether  or  not  these  latter  are  modified  for  each 
department,  so  thai  each  foreman  receives  information  only 
aboul  that  portion  of  the  order  that  concerns  him  (thus  making 
them  into  Departmental  Orders)  is  a  matter  also  depending  on 
the  way  in  which  the  planl  is  organized.  The  chief  thing  to 
observe  from  the  accounting  viewpoinl  is  that  each  Production 
Order  .-hall  he  numbered  consecutively,  and  that  if  split  up  de- 
part mentally,  that  each  Departmental  Order  shall  bear  the 
-aim-  number  as  i  he  original  order. 

This  i-  secured  by  means  of  a  Production  Order  Register  (Fig. 


ORDERS— PRODUCTION  ORDERS 


261 


59)  in  which  a  series  of  numbers  are  printed  or  stamped,  and 
each  new  order  receives  an  assignment  of  the  next  vacant 
number.  Brief  particulars  of  the  order  sufficient  for  identifica- 
tion are  then  entered  against  the  number,  and  columns  are 
frequently  provided  for  date  promised  and  date  delivered,  and 
sale  price.  Where  date  columns  are  used,  an  additional  column 
as  shown  may  be  usefully  provided,  in  which  is  entered  the 
difference  between  the  promised  date  and  the  date  of  actual 
delivery,  this  being  the  delay  which  has  taken  place. 

Where  production  consists  of  standard  processes,  as  in  most 
manufacturing  industries  not  of  an  engineering  character, 
it  is  a  common  practice  to  have  Production  Orders  prepared  in 
the  form  of  printed  slips  (Fig.  60).  From  an  accounting  view- 
point these  present  no  special  features,  being  merely  labor- 
saving  devices  rendered  possible  by  the  fact  that  all  such  work 
goes  through    regular  and  invariable  stages.     The  printed  slip 


Progressiv< 
No. 

Date 

Customer 

For 

Date 
Promised 

Date 
Delivered 

a 

a 

Price 

Fig.  59. — Progressive  Number  Register  of  Production  Orders. 

is  frequently  in  coupon  form,  much  like  a  long-distance  rail- 
road ticket,  so  that  as  the  order  progresses  through  the  various 
departments,  one  coupon  after  another  is  detached  and  sent 
into  the  office  having  control  of  the  course  of  production.  In 
this  way  the  regular  progress  of  the  order  is  signalled,  and  any 
order  that  is  lagging  behind  can  be  looked  up  and  urged  forward. 
The  figure  explains  itself,  save  that  the  small  squares  contain 
the  dates  at  which  the  work  should  leave  each  department.  Pro- 
vision is  also  made  for  noting  the  falling  out  of  the  original  number 
of  parts  by  spoilage,  in  order  that  provision  may  be  made  for 
supplementary  parts  to  be  put  in  hand.  But  in  many  trades, 
where  special  lots  are  put  in  hand  for  customers,  it  is  understood 
that  whatever  number  comes  through  in  the  batch,  having  sur- 
vived all  the  accidents  of  production,  shall  be  accepted  by  the 
customer  as  fulfilling  his  order.  He  does  not,  of  course,  pay  for 
the  spoiled  parts,  but  is  invoiced  on  the  basis  of  the  number 
actually  shipped. 


262      MANUFACTURING  COSTS  AND  ACCOUNTS 


Order  for 

3161 

POLISHING  DEPT. 

Man's    \'n 

3161 

Spoiled 

Inspected  by 

TEMPERING  DEPT. 

Man's  No. 
Tarts  Received 



3161 

.Oven  No. 
Spoiled 

Tarts  Good 

Inspected  by 

TURNING  DEPT. 
No 

3161 

Parts  Received 
Parts  Good 

Spoiled 

Inspected  by 

DRILLING  DEPT. 

Man's  Nn. 

3161 

Mach.No. 

Parts  Received 

Parts  Good 

Inspected  b 

y 

MATERIAL 

3161 

60.     -Combined   Production  and   Department  Order  for  standardized 
process  work. 


Component 
Schedule 

Production    Ord 

er    No. 

Customer 

Their  Order 

Date 

i 

e  of 

Process 

Component 
Order  No. 

^====^ 

61. — Component  Schedule  for  parts  and  processes. 


ORDERS— PROD UCTION  ORD l-h'S 


263 


The  foregoing  (Fig.  GO)  is,  of  course,  a  Departmental  Order,  or 
rather,  set  of  Departmental  Orders.  But  there  is  nothing  to  pre- 
vent additional  coupons  being  inserted,  so  thai  two  or  more 
coupons  apply  to  a  single  department. 
Thus,  for  example,  there  might  happen 
to  be  two  distinct  drilling  processes, 
each  having  its  separate  coupon.  This 
would  be  equivalent  to  the  issue  of 
Component  Orders  for  these  separate 
processes,  but  in  standardized  work 
of  this  kind  it  is  not  usual  to  recog- 
nize any  smaller  subdivision  than  the 
department,  even  though  the  material 
may  pass  through  several  machines  in 
any  one  department.  In  the  example 
given  all  time  and  material  would  be 
charged  against  order  3,161,  in  what- 
ever department  the  work  was  done. 

We  have  now  to  consider  those 
cases  in  which  considerable  detail  is 
required  in  the  costing  of  a  Production 
Order,  involving  the  ascertainment  of 
cost  of  perhaps  scores  or  hundreds  of 
parts,  each  or  many  of  these  parts 
being  subjected  to  more  than  one 
process  or  operation. 

In  such  cases,  the  best  procedure  is 
to  list  all  the  separate  parts  on  a  Com- 
ponent Schedule  (Fig.  61).  Against 
each  component,  its  name  and  the  dif- 
ferent processes  or  operations  to  be 
performed  on  it  are  entered.  When 
the  list  is  complete,  numbers  are  as- 
signed to  each  component  from  a 
Component  Order  Assignment  Reg- 
ister (Fig.  62)  which  is  a  plain  col- 
umnar  book,  one  column  containing 

progressive  numbers  from  1  to  9,999,  and  the  other  column  be- 
ing left  blank  for  insertion  of  Production  Order  numbers.  An 
entire  block  of  numbers  is  assigned  to  a  particular  Production 
Order,    corresponding   to   the   number   of   components   it  com- 


Component 
Numbers 

Assigned  to 
Prod.Order 

K  1760 

3290 

K   1761 

It 

K   1762 

<( 

K   1763 

<  I 

K  1764 

3291 

K   1765 

<< 

K   1766 

<< 

K   1767 

«. 

K   1768 

<« 

K  1769 

<( 

K  1770 

a 

K   1771 

1 1 

K   1772 

3292 

K   1773 

it 

K   1774 

it 

K   1775 

lC 

K  1776 

>< 

K  1777 

i  ( 

K   1778 

it 

K  1779 

3293 

K  1780 

it 

Fig.    62.' — Component  Order 
Number  Assignment  Register. 


MANUFACTURING  COSTS  AND  ACCOUNTS 

Thus,  in  the  example  shown,  Production  Order  3,291 
has  a  block  of  component  numbers  assigned  to  it,  beginning  with 
1,764  and  ending  with  1,771.  It  is  sometimes  the  practice  to 
run  a  Letter  of  the  alphabet  before  each  component  number,  such 
letter  changing  with  each  hundred  numbers.  Thus  numbers  1 
to  99  would  be  prefixed  by  A,  numbers  100  to  199  by  B  and  so 
forth.  The  object  of  this  is  to  enable  errors  in  numbers  to  be 
ivered  before  accounting  entries  have  been  made.  Thus  if 
an  error  in  the  component  number  Kl,768  were  made,  so  that  it 
read  Kl,968,  the  cost  clerk  would  know  at  once  that  no  such  com- 
bination existed,  and  that  something  was  wrong.  The  same 
would  be  true  if  K2,7G8  were  written.  There  is  no  great  impor- 
tance in  the  idea,  but  it  certainly  assists  in  discovering  and  local- 
izing errors  in  numbers  before  mischief  is  done.  This,  however,  is 
a  mat  ter  t  hat  does  not  concern  us  at  the  present  stage. 


Component 
Order 

No. 

..Production    Order_No 

Pnrt. 

J^tv 

Operation 

Man's  Name 
Machine  No. 

__No. 

Date  Due 

Fig.  63. — Simple  form  of  daywork  Component  Order. 

The  Component  Schedule  having  been  completed,  it  is  a  fre- 
quent practice  to  make  out  a  complete  set  of  Component  Orders 
in  advance  One  of  these  will  be  made  for  each  operation  on 
each  component,  so  that  in  some  instances  there  will  be  two  or 
more  such  ( lomponeni  Orders  bearing  the  same  component  num- 
d  form  for  such  an  order  is  shown  in  Fig.  63. 
The  principal  items  to  be  tilled  out  are  Production  Order  number, 
component  number,  name  of  part,  quantity  required,  nature  of 
the  operation  to  be  performed,  and  the  date  at  which  the  com- 
ponent should  h:  completed  as  far  as  the  operation  in 
question  is  concerned.  When  the  whole  series  of  Component 
Orders  are  completed,  they  are  sorted  out  in  departmental  groups, 
and  forwarded  either  to  a  production  department  charged  with 
controlling  the  course  of  production,  or  to  the  various  foremen 
of  depart  ments. 

1,1  ;  of  Component  Orders,  work  on  which  is  to  be  done 


ORDERS— PRODUCTION  ORDERS 


265 


O    l> 

&"E 

So 


c        ea 

•2     S5 

Sao 

arto 

O    3    S 


£     SB    M 


on  some  piecework,  premium  or  bonus  plan,  the  form  Fig.  04  may 
be  used.  This  is  similar  to 
Fig.  63,  except  that  addi- 
tional space  is  provided,  for 
particulars  of  the  time  allow- 
ance, or  piecework  price,  the 
earnings  of  premium  or 
bonus,  and  for  a  detachable 
stub,  on  which  the  extra 
earnings  of  the  man  may  be 
entered,  certified,  and 
checked.  This  stub  goes  to 
the  pay-roll  office  and  to  the 
cost  clerk  as  will  be  described 
in  the  chapters  on  Costing. 

In  practice  there  are  a 
number  of  different  blanks 
and  methods  of  transmitting 
orders  to  the  departments 
and  the  men,  besides  the 
general  types  shown  here. 
In  non-assembling  indus- 
tries, that  is  industries  which 
do  not  make  one  part  of  the 
order  in  one  place  and  an- 
other portion  in  another 
with  the  necessity  for  subse- 
quent assembly  and  fitting 
of  the  separate  parts  to- 
gether to  form  the  completed 
article,  it  is  not  uncommon 
to  find  what  might  be  termed 
a  "waybill"  or  "follower" 
system  in  use.  The  Waybill 
or  "Follower"  is  a  Produc- 
tion Order,  in  which  the  dif- 
ferent steps  of  manufacture 
are  enumerated,  and  perhaps 
the  use  of  certain  subsidiary 
materials  indicated,  and  the 
document    accompanies   the 


a  a  a 


a  °  = 


MANUFACTURING  COSTS  AND  ACCOUNTS 

goods  from  point  to  point  through  the  shops,  until  completed. 
Time  is,  of  course,  charged  to  the  order  number  borne  by  the 
Waybill  itself.  A  good  example  of  such  a  system  of  orders  is 
e  found  in  printing  plants,  wherein  the  Production  Order 
blank  is  printed  on  the  outside  of  an  envelope,  the  envelope  it- 
self being  occupied  by  the  draft  or  "copy"  belonging  to  the 
mer.  Space  is  provided  on  the  Production  Order  blank 
fur  particulars  as  to  material  (paper  stock)  to  be  used,  for  in- 
structions  as  to  type  and  style  of  composition,  for  data  as  to  the 
kind  and  color  of  ink  to  be  used,  and  other  departmental  infor- 
tnation,  including  shipping  instructions. 

Such  a  Follower  is,  in  fact,  a  combined  Production  and  Depart- 
mental Order  similar  in  intent  to  that  shown  in  Fig.  60.  It  has 
exactly  the  same  accounting  validity.  Indeed  from  the  account- 
ing viewpoint  very  little  importance  attaches  to  the  physical 
shape,  or  ruling  of  the  order  blanks,  but  much  to  the  relation 
between  the  components  or  processes,  and  the  number  and 
quantity  of  goods  to  be  made.  For  as  was  said  above,  the 
order  number  series  control  the  amount  and  nature  of  the  detail 
that  can  be  provided  by  the  cost  accountant. 

This  is  so  important  a  matter  that  it  will  be  well  to  discuss 
it  at  some  length.  Production  Orders  represent  definite  quan- 
tities of  work.  In  cases  where  all  work  goes  through  unvarying 
stages,  it  is  evident  that  if  we  establish  connection  between  any 
of  these  stages  and  a  Production  Order  number,  ultimate  detail 
is  attained  without  the  necessity  for  any  further  complexity. 
Thus,  for  example,  if  only  one  polishing  process  takes  place  on 
each  older,  then  a  daily  record  of  all  orders  on  which  polishing 
has  been  done  exhausts  all  the  information  to  be  obtained  about 
ing.  A  polishing  charge  against  Production  Order  5,674 
ran  only  mean  one  thing.  Similarly  with  all  the  other  processes 
in  a  fixed  or  standardized  series. 

But,  on  the  other  hand,  if  Production  Order  5,674  contains 
several  parts  or  components,  some  or  all  of  which  are  likely  to 
•  the  polishing  process,  then  it  will  obviously  not 
exhaust  the  questions  that  may  be  asked  if  we  only  record  so 
many  hours  and  dollar-  against  polishing  on  Order  5,674.  For  it 
might  be  asked,  'how  much  was  expended  on  polishing  this  com- 
■  t  and  how  much  on  that?"  To  answer  such  an  inquiry  we 
should  h  mechanism  for  identifying  individual 

kind-  of  components,  or,  in  other  words,  in  addition  to  a  Produc- 


ORDERS— PRODUCTION  ORDERS  267 

tion  Order  series  of  numbers  we  must  have  a  Component  Order 
series  of  numbers. 

On  the  other  hand,  supposing  the  work  of  the  polishing 
department  consisted  of  polishing  handwheels  and  levers,  no 
other  components  ever  reaching  the  department,  then  it  is  ob- 
vious that  unless  we  establish  a  firm  connection  between  all  the 
components  of  a  Production  Order  and  the  Production  Order 
number  itself,  we  should  be  unable  to  say  which  hand  wheel  and 
which  lever  belonged  to  any  particular  machine.  We  would  get 
to  know  the  cost  of  polishing  each  and  every  one  of  such  articles 
that  passed  through  the  polishing  shop,  but  we  should  not  be  able 
to  identify  any  of  them  with  the  finished  and  assembled  machine 
they  were  ultimately  built  into.  This  is  equivalent  to  saying 
that  in  all  cases  Component  Orders  are  subdivisions  of  Produc- 
tion Orders.  Production  Orders  can  exist  without  Component 
Orders,  but  we  cam\ot  have  the  latter  save  as  subdivisions  of 
the  former. 

Whether  it  is  necessary  to  go  the  length  of  setting  up  a  Com- 
ponent Order  mechanism  will  depend  first  on  the  nature  of  the 
work.  It  does  not  follow  that  we  must  have  Component  Orders 
because  components  exist  in  our  product.  It  may  easily  happen, 
as  in  shoemaking,  that  though  there  are  several  components, 
the  processes  performed  on  each  component  are  separate  and  dis- 
tinct. The  processes  on  one  component  are  never  applied  to 
another  component.  Thus  no  ambiguity  arises.  All  work  on  a 
lot  is  charged  to  a  simple  Production  Order,  but  if  required,  the 
cost  of  each  process  on  each  component  can  readily  be  sorted  out 
and  ascertained  separately.  Component  Orders  are,  therefore, 
necessary  only  when  a  number  of  components  go  through  like 
processes.  The  classic  example  of  this  condition  of  affairs  is  the 
engineering  industry.  Machine-shop  manufacture  includes  com- 
paratively few  different  kinds  of  processes,  but  often  innumer- 
able different  components.  The  former  may  reach  a  score,  the 
latter  may  reach  thousands. 

Consequently,  to  say  that  Production  Order  5,674  was  charge- 
able with  100  hr.  and  $25  cost  for  milling,  would  be  indefinite 
indeed.  For  it  might  happen  that  20  separate  parts  or  com- 
ponents of  Order  5,674  had  passed  through  a  milling  operation. 
Hence,  we  supplement  the  order  series  which  gives  us  5,674, 
with  another  order  series  that  gives  us  separate  numbers  for  each 
of  the  20   components   comprised   in   5,674.     Then   the  milling 


MAM  FACTURING  COSTS  AND  ACCOUNTS 

machine  operator  will  charge  his  time  to  Production  Order 
5,674,  ( lomponent  Order  2,359,  and  so  forth.  By  this  means  the 
ambiguity  disappears.  We  know  precisely  what  Production 
( >rder  and  what  component  of  that  Production  Order  is  in  ques- 
tion,  and  this  information  exhausts  the  subject.  If  the  milling 
operator's  time  sheel  Lists  all  the  Production  Orders,  and  all  the 
Component  Orders  he  has  worked  on  during  the  day,  the  whole 
field  of  costing  is  covered  as  far  as  he  is  concerned. 

Production  Orders,  then,  control  the  cost  of  lots,  and  of  all 
processes  on  lots.  (A  lot  may,  of  course,  be  simply  one  article, 
or  it  may  be  a  million  articles.)  If  the  article  to  be  made  consists 
eparate  parts  or  components,  the  Production  Order  will 
-till  control  the  costs  satisfactorily  unless  any  one  process  is 
med  on  more  than  one  kind  of  component.  Then  in  order  to 
be  able  to  ascertain  process  cost  on  individual  kinds  of  com- 
ponents, each  of  the  latter  must  be  distinguished  by  a  number, 
that    is,  Component  Orders   must  be  instituted. 

Even  this  is  not  a  hard  and  fast  rule.  It  often  happens  that 
some  one  process  is  of  very  general  application,  as  for  example; 
tempering  or  annealing,  dipping  in  varnish  vats,  and  in  some 
instances,  an  operation  like  drilling.  In  such  cases  it  is  not  an 
infrequent  practice  to  substitute  a  fixed  charge  based  on  quan- 
tity or  weight  or  number  of  articles  handled,  for  a  regular  cost- 
peration.  Each  Production  Order  thus  receives  a  debit 
for  the  services  of  the  operation  as  a  whole,  components  being 
ignored.  This,  however,  is  a  detail  that  need  not  divert  our 
lion.  It  is  introduced  only  to  show  that  sometimes  the 
occurrence  of  a  process  common  to  many  components  does  not 
necessarily  give  rise  to  a  necessity  for  Component  Orders. 

It  musl  noi  be  forgotten,  however,  that  orders  control  the  issue 
of  materia]  as  well  as  the  charging  of  time.  In  standardized 
work,  as  in  machine  building,  it  is  customary  to  originate  instruc- 
tions as  to  the  issue  of  material  by  means  of  a  Bill  of  Material, 
:  65.  One  such  bill  is  issued  in  connection  with  each  Produc- 
tion (  tnler.  and  as  will  be  seen  by  the  ruling,  provision  is  made  for 
entering  the  Componenl  Order  number  against  each  item 
specified.  This  latter  provision  is,  however,  not  necessary  unless 
Component  Ordei  ecessitated  as  described  above.     For,  as 

will  be  seen  from  inspei  the  bill,  each  component  is  issued 

and  priced  separately,  and  as  long  as  its  name  is  fixed  and  not 
subject  to  any  ambiguity  of  description,  its  cost  can  be  readily 


ORDERS— PROD UCTION  ORDERS 


269 


identified  after  the  issue  details  have  been  filled  out  by  the 
storekeeper. 

In  Fig.  60  it  will  also  be  noticed  that  the  bottom  coupon  (the 
first  to  be  detached)  is  devoted  to  material.  The  order  is  first 
sent  to  the  storekeeper,  who  either  issues  the  material  there  and 
then,  or  orders  it  if  not  on  hand,  and  when  he  issues  it  to  the  fore- 
man of  the  drilling  department,  detaches  the  coupon  and  sends 
it  in  to  the  production  control  clerk.  At  the  same  time  he  charges 
up  the  material  to  the  order  number  shown  on  the  coupons.  The 
rest  of  the  order  accompanies  the  material  into  the  shop. 

The  part  played  by  the  Production  Order  in  regard  to  material 
is,  therefore,  a  simple  one.     Material  is  usually  controlled  by  the 


Bill  of 
Material 


-Production  Order  No. 


Customer  — 
Their  Order 
For 


Dated. 


Q'ty. 


Component 
Order  No. 


Material 
Required 


Ref.No. 


Fig.  65. — Bill  of  Material  and  Stores  Issues  Record. 


Production  Order  itself,  or  by  a  Bill  of  Material  in  conjunction 
with  it.  In  some  cases,  however,  material  is  drawn  out  of 
stores  and  charged  to  Component  Orders,  but  this  practice  is 
on  the  decline,  being  superseded  by  the  far  better  method  of 
listing  in  advance  all  the  material  likely  to  be  required  on  a  given 
Production  Order,  and  getting  this  to  the  storekeeper  at  the 
earliest  possible  moment,  instead  of  waiting  until  presentation  of 
a  Component  Order,  when  it  is  often  discovered  that  no  material 
of  the  kind  is  available. 

In  engineering  work  particularly,  the  making  out  of  a  Produc- 
tion Order  may  involve  the  preparation  and  issue  of  certain 
auxiliary  orders  at  the  same  time.  The  Bill  of  Material  has 
already  been  mentioned.     Of  similar  nature  are  the  Tool  Sched- 


270      MANUFACTURING  <  OSTS  AND  ACCOUNTS 

ule  and  Pattern  Schedules  (see  Fig.  58).     These  specify  what 

ial  tools,  jigs,  dies,  and  fixtures  are  to  be  used  in  connection 

with  the  order,  and  what  patterns  arc  to  be  sent  to  the  foundry 

in  connection  with  the  casting  of  components.     These  operations 

no  accounting  significance,  unless,  as  will  often  happen, 

iols,  patterns,  dies,  etc.,   arc  necessary,   or  patterns  have 

to   be  altered  in  some  way  to  suit  the  specification  of  certain 

compone] 

In  such  cases  (new  tools  and  patterns)  Plant  Addition  Orders 
are  necessary.  In  the  case  of  altering  patterns,  the  expense  is 
sometimes  taken  care  of  by  a  Standing  Expense  Order  charge- 
able against  foundry  operations  generally,  but  sometimes  sep- 
arate record  is  made  of  such  expense,  and  it  is  charged  against 
the  Production  Order  for  which  it  has  been  incurred. 


PLANT  ADDITION  ORDER  NO. 


Signature, 


For  use  on  Trod.  Order  No. 

Date  Wanted Advise  Mr. . 


Charge  Cost  to  Dept. Acct^ 


Fig.  66. — Plant  Addition  Order. 

• 
Figure  GG  shows  the  essential  features  of  a  Plant  Addition 
<  )rdcr,  which  is  used  for  all  addition  to  capital  values,  as  well  as 
the  making  of  new  idols  and  patterns.     Thus,  new  fixtures, 
ions  of  all  kinds,  new  machines,  additions  to  existing  build- 
new  wiring  and  piping  and  in  general  any  new  work  for  the 
firm  itself  will  be  authorized  by  a  Plant  Additions  Order.     The 
•i.d  features  of  such  an  order  are,  a  serial  number  which 
will  be  obtained  from  a  Plant  Additions  Orders  Register  very 
similar  to  Fig.  59,  space  for  particulars  of  the  order,  date  wanted, 
o  to  be  advised  when  completed,  department  and  account 
chargeable,  and,  in  n  of  new  patterns,  tools,  etc.,  space 

ndicating  what  Production  Order  has  given  rise  to  the  neces- 
sity for  the  new  work.  The  order  will  be  signed,  stamped  or 
initialled  by  the  party  authorizing  the  work. 


ORDERS— PRODUCTION  ORDERS  271 

The  activities  set  up  by  these  Plant  Addition  Orders  are  treated 
in  exactly  the  same  way,  from  the  accounting  viewpoint  as 
work  on  Production  Orders.  They  are  in  fact  Production  Orders, 
only  the  product  is  not  sold,  but  charged  up  to  the  firm's  own 
Capital  account.  They  represent  work  which  it  is  more  conveni- 
ent for  the  plant  to  undertake  on  its  own  premises  and  with 
its  own  men,  than  to  purchase  from  outside  firms.  Therefore, 
until  the  costs  of  such  an  order  are  completed,  and  it  is  ready  for 
crediting  to  Manufacturing  account,  it  is  treated  exactly  as  if 
it  were  a  Production  Order  of  the  ordinary  kind.  What  happens 
to  it  on  completion  will  appear  in  a  later  chapter. 


CHAPTER  XIV 
COST  SHEETS  AND  BURDEN 

The  subject  of  Cost  Sheets  is  so  intimately  connected  with 
that  of  orders,  thai  we  must  refer  to  it  in  a  preliminary  way  at 
this  point,  although,  in  fact,  the  sources  of  the  entries  to  be  made 
tui  these  Cost  Sheets,  namely,  the  charges  for  material,  time, 
premium  balances,  depreciation,  etc.,  have  not  yet  been  con- 
sidered.     These  will  be  dealt  with  in  succeeding  chapters. 

Just  as  orders  cover  the  whole  field  of  factory  activity,  inas- 
much as  nothing  can  be  done  in  the  factory  save  by  authority 
of  an  existing  order,  whether  a  Standing  Order,  a  Production 
Order,  or  a  Plant  Addition  Order;  so  Cost  Sheets  cover  the 
whole  field  of  the  record  of  such  activity.  Every  act  undertaken 
to  carry  out  an  order,  whether  in  the  way  of  consuming  material 
or  of  using  up  time,  must  be  reflected  in  a  Cost  Sheet. 

Every  order  number  has  a  corresponding  Cost  Sheet. 

This  applies  not  only  to  Production  Orders,  Plant  Addition 
Orders  and  Component  Orders,  but  also  to  Service  Orders. 
expenditure  of  wages,  salaries  and  material  in  the  shops 
musl   find  its  way  to  a  Cost  Sheet. 

Reference  to  the  general  diagram  will  show  that  Cost  Sheets 
have  different  destinations  according  to  their  class.  Cost  Sheets 
of  Service  Orders  find  their  way,  through  Burden  Journal  into 
Departmental  Burden  accounts,  while  Cost  Sheets  of  Produc- 
tion Orders  (or  of  Component  Orders  collected  under  their 
Production  Order  grouping)  find  their  way  to  Manufacturing 
mts  through  Manufacturing  Journal,  and  Plant  Addition 
Order  Co  31  ts  find  their  way  to  Plant  Additions  account 
through  the  Bame  journal. 

I  urther  it  will  be  observed  that  production  makes  a  credit 
to  Departmental  Burden  account,  which  credit  really  represents 
an  absorption  of  burden  by  individual  Production  Order  Cost 
Sheets  on  one  or  other  of  the  methods  of  allocating  burden  that 
will  be  described  later.  Ai  this  stage  it  is  only  necessary  to  note 
that   the  total  accumulated  in  Burden  account  each  month  is 

272 


COST  SHEETS  AND  BURDEh  273 

distributed  by  fixed  rules  over  all  the  Cost  Sheets  that  represent 
Production  and  Plant  Addition  Orders. 

We  have  thus  two  great  groups  of  Cost  Sheets — those  which 
collect  particulars  of  service  or  burden  expenditure,  and  those 
which  collect  particulars  of  cost  of  production  and  new  plant. 
These  two  classes  of  Cost  Sheets  are  totally  different  in  character 
and  aim.  Service  Cost  Sheets  represent  Standing  Orders,  and 
are  consequently  cleared  or  charged  off  at  the  end  of  each  month, 
though  the  Standing  Order  numbers  remain  alive  and  unaltered. 
Production  and  Plant  Cost  Sheets  on  the  other  hand,  remain 
open  and  uncredited  until  completion  of  the  work  for  which  they 
have  been  issued.  Then  they  are  withdrawn  and  the  numbers 
are  not  reissued.  Thus  they  may  last  for  two,  three  or  any 
number  of  months,  and  in  each  month  will  be  charged  with  the 
wages  and  material  expended  on  them,  and  also  with  a  propor- 
tionate amount  of  burden. 

It  will  be  recognized,  therefore,  that  Service  Cost  Sheets  are 
very  simple  affairs.  They  have  but  to  provide  for  the  collection, 
daily  or  weekly,  of  certain  items  of  wages  and  material,  and  at  the 
end  of  the  month,  the  total  of  these  items  is  charged  off  through 
Burden  Journal,  leaving  a  clean  slate  for  the  next  month's 
items. 

But  on  the  other  hand  Production  Orders  (whether  for  salable 
goods  or  for  plant  additions)  require  Cost  Sheets  that  will  take 
care  of  wages  and  material  expended  on  the  order,  and  also  take 
care  of  the  allocation  of  burden.  Now  as  burden  may  be  allo- 
cated to  Production  on  three  wholly  different  methods,  it  follows 
that  there  will  be  three  distinct  types  of  Production  Cost  Sheet 
corresponding. 

Moreover,  there  is  the  difference  between  Production  Orders 
and  Component  Orders  to  be  taken  care  of.  While  the  form  of 
their  Cost  Sheets  is  exactly  the  same,  as  might  be  expected, 
since  the  latter  represent  small  portions  or  subdivisions  of  the 
former,  still  some  mechanism  has  to  be  set  up  whereby  all  the 
Component  Orders  pertaining  to  any  one  Production  Order  may 
be  summarized  and  presented  in  some  convenient  or  logical 
grouping,  so  that  the  entire  cost  of  the  Production  Order  is  shown. 
In  other  words,  having  found  the  cost  of  separate  components 
by  means  of  Component  Orders  and  Component  Cost  Sheets, 
we  must  combine  this  information,  so  as  to  show  the  cost  of  the 
whole. 

18 


274      MANUFACTURING  COSTS  AND  ACCOUNTS 

From  what  has  already  been  said  about  Production  Orders,  it 
will  be  readily  understood  that  any  plant  that  has  a  simple 
Production  Order  system,  necessarily  has  a  simple  Cost  Sheet 

m.  In  a  continuous  industry,  where  the  product  is  uniform 
in  character  from  month  to  month,  and  each  Production  Order 
issuei  I  lit'  whole  manufacturing  activity  for  a  whole  month, 

then  a  single  Cost  Sheet  to  which  are  charged  all  the  direct 
wages  and  direct  material  for  the  month,  is  all  that  is  necessary. 
But  even  in  this  case,  subdivision  of  service  costs  into  their 
several  classes,  as  explained  in  a  former  chapter,  is  desirable  in 
order  that  comparison  of  one  month  with  another  along  the 
observable  lines  of  expense  may  be  made.  The  total  of  service 
items  is  then  chargeable  to  the  single  Production  Order  without 
any  particular  method  of  allocation. 

But  when  we  have  more  than  one  Production  Cost  Sheet,  then 
the  total  of  service  items  must  be  divided  between  the  Production 
Cost  Sheets  on  some  predetermined  plan.  If  we  have  say,  six 
Production  Orders  running,  then  burden  must  be  prorated  over 
all  the  six.  This  may  be  done  in  different  ways,  and  it  is  the 
existence  of  this  necessity  of  distributing  burden  over  Produc- 
tion Cosl  Sheets  on  some  definite  principle  that  makes  all  the 
complication  of  cost  keeping.  As  wall  be  seen  in  later  chapters, 
there  are  three  well-defined  ways  of  doing  this,  depending  upon 
the  nature  of  the  business  to  some  extent,  and  the  degree  of 
refinement  and  accuracy  that  is  sought  for. 

So  far  we  have  spoken  of  burden  as  if  it  were  wholly  derived 
from  the  expenditure  of  wages,  salaries  and  material,  w'hich  are 
charged  out  to  (  !os1  Sheets  representing  Standing  Orders.  But 
there  are  other  items  of  importance  that  form  part  of  burden. 

rence  to  the  general  diagram  will  show  that  credits  are  made 
from  the  Burden  Journal  to    Depreciation,    Rents,  Taxes  and 

ranee,    Works    Expense,    Spoilage   and   Interest   accounts 

rest,  however,  is  an  optional  item,  and  the  circumstances 
under  which  it  is  chargeable  will  be  considered  in  a  separate 
chapter.  Ii  may  be  ignored  at  the  present  stage  of  our 
discussi<  ■ 

All  these  credits  are  made  because  equivalent  charges  have 
been  made  to  Standing  Orders,  by  means  of  the  schedules  shown 
in  the  diagram,  or  by  special  enl  lies  in  the  case  of  works  expense 
and  spoilage.  Thus  there  will  be  Standing  Orders  for  depre- 
ciation on  buildings,  and  one  such  order  number  will  be  allotted 


COST  SHEETS  AND  BURDEN  275 

to  each  department.  Similarly  each  department  will  have  a  set 
of  Standing  Order  numbers  that  will  take  care  of  monthly  charges 
for  rent,  taxes,  insurance  of  one  kind  or  another,  special  items  of 
works  expense,  the  cost  of  spoiled  work,  etc.  Thus  alongside 
the  Standing  Orders  to  which  salaries,  wages  and  material  are 
chargeable  there  will  be  other  Standing  Orders  to  which  such 
items  as  depreciation,  etc.  are  chargeable.  These  tabulated, 
calculated  or  scheduled  charges  will  be  made  once  a  month,  and 
consequently  a  single  entry  on  the  corresponding  Cost  Sheet 
will  suffice  for  the  whole  month's  accounting  for  that  item. 
And  as  such  charges  are  immediately  passed  on  to  the  Depart- 
mental Burden  accounts  by  means  of  Burden  Journal,  it  is  evi- 
dent that  the  provision  of  a  Cost  Sheet  for  such  items  is  a  merely 
formal  matter,  and  in  fact  is  frequently  dispensed  with,  as  will 
be  shown  later.  Nevertheless,  theoretically  all  such  items  are 
chargeable  to  a  Standing  Order  Cost  Sheet,  and  this  Cost  Sheet 
is  entered  on  Burden  Journal  precisely  as  the  other  kind  of  Stand- 
ing Orders  which  collect  items  of  salary,  wages  and  material  are 
entered.     There  is  no  difference  between  them  in  principle. 

Standing  Order  Cost  Sheets,  then,  are  the  medium  of  collec- 
tion of  items  of  wages,  salaries,  material,  and  such  items  as 
depreciation,  etc.  that  have  been  found  chargeable  against 
particular  departments  for  particular  services  during  the  month. 
When  all  such  items  are  entered,  they  are  totalled,  and  the  total 
charged  out  in  Burden  Journal  against  the  department  respon- 
sible. Credits  are  also  made  through  the  Burden  Journal  for  the 
corresponding  amount  of  wages,  salary,  material,  depreciation, 
etc.,  as  shown  by  the  general  diagram.  By  this  procedure  the 
Standing  Order  Cost  Sheets  are  discharged  of  all  contents,  and 
as  far  as  that  month's  work  is  concerned  are  cancelled. 

Production  and  Plant  Addition  Cost  Sheets  are  the  medium 
by  which  items  of  wages  and  material  directly  identifiable  with 
work  on  such  orders  are  collected.  When  all  the  items  for  the 
month  are  so  collected,  and  each  sheet  is  totalled,  some  method 
is  found  of  prorating  all  the  burden,  which  has  been  extracted 
from  the  Standing  Order  Cost  Sheets,  over  them.  This  share 
of  burden  is  then  charged  to  each  Cost  Sheet. 

The  Cost  Sheets  are  then  entered  in  Manufacturing  Journal, 
and  the  current  month's  wages,  material,  and  burden  totals 
being  entered  in  the  proper  columns  (see  general  diagram) 
credits  are  made  to  Stores,  Wages,  Burden  (and  in  some  cases  to 


276      MANUFACTURING  COSTS  AND  ACCOUNTS 

Work  Expense  account),  and  debits  to  Manufacturing  account 
for  the  total  of  Production  Order  costs,  and  to  Plant  Additions 
Mint  for  the  total  of  Plant  Addition  costs. 

If  we  consider  a  plant  at  the  end  of  its  first  month  of  opera- 
tion, when  nothing  has  yet  been  completed  or  taken  out  of  the 
shops,  then  it  will  be  obvious  that  all  the  expenditure  chargeable 
to  the  factory  has  now  arrived  in  the  Manufacturing  account  and 
the  Plant  Additions  account.  Or,  if  there  were  no  plant  additions 
in  hand,  as  would  probably  be  the  case  in  a  large  variety  of  in- 
dustries, all  such  expenditure1  would  now  be  represented  in  Manu- 
facturing account.  For  example,  all  expenditure  on  wages  and 
salaries,  having  been  divided  to  begin  with  between  Standing 
rs  and  Production  Orders,  and  all  Standing  Order  cost  having 
transferred  to  Burden  account,  and  then  allocated  over  Produc- 
tion Order  Cast  Shots,  it  follows  that  the  latter  now  contain  all 
the  expenditure  on  salaries  and  wages.  Part  of  this  will  be  direct, 
and  will  bi  own  on  the  Production  Order  Cost  Sheets  as  direct 
wages,  the  remainder  will  be  disguised  as  burden,  of  which  a 
share  has  been  allotted  to  each  order.  But  between  direct  wages 
and  burden,  the  whole  of  the  charge  against  Factory  for  wages 
and  salaries  will  be  found  on  the  Production  Order  Cost  Sheets. 

Similarly,  the  transfer  of  all  the  other  items  of  expenditure 
could  be  traced,  and  the  same  would  be  found  to  be  true.  The 
complete  collection  of  Production  Order  Cost  Sheets,  therefore, 
at  the  end  of  the  month,  contains  the  complete  cost  of  production 
for  that  month.  And  as  this  total  is  charged  to  Manufacturing 
account  by  means  of  the  entries  on  Manufacturing  Journal,  it 
follows  that  Manufacturing  account  contains  the  whole  cost  of 
rnph  ted  orders  now  in  the  plant.  And  the  various  Production 
<  >rder  <  !os1  Sheets  are  the  detail  of  that  total. 

In  other  words,  the  balance  in  Manufacturing  account  at  any 
month  end  is  an  amount  of  which  the  detail  items  are  to  be 
found  on  the  Production  Order  Cosl  Sheets.  In  a  sense,  Manu- 
facturing accounl  i-  like  a  Control  account,  of  which  the  Cost 
Sheets  are  the  Item  accounts,  similar  to  Stores  Control  account 
and  Stores  ttem  Cards,  or  Plant  Control  account  and  Plant 
Iti'in  ( lards. 

The  function  of  (  'o.-t  Sheets  may  now  be  summed  up  in  a  few 
word-.  Standing  Order  Sheds  colled  items  of  service  expense, 
including  depreciatioi  and  by  grouping  these  sheets  in 

departmental  groups  and  entering  them  on  a  Burden  Journal,  we 


COST  SHEETS  AND  BURDEN  277 

are  enabled  to  credit  Wages,  Stores,  Depreciation,  etc.,  accounts, 
and  debit  Department  Burden  accounts.  When  this  is  done,  the 
Standing  Order  Cost  Sheets  are  like  a  cleaned  slate,  and  the  same 
order  numbers  are  ready  for  the  next  month's  items. 

Production  Order  Cost  Sheets  collect  items  of  direct  labor  and 
direct  material.  They  also  collect  a  share  of  burden  which  is 
allotted  to  them  on  some  definite  basis  which  will  be  considered 
later.  Being  entered  on  Manufacturing  Journal,  the  totals  of 
direct  wages  are  credited  to  Wages  account,  the  totals  of  direct 
material  to  Stores  account,  and  the  totals  of  burden  to  Burden 
account.  Manufacturing  account  is  then  charged  with  the 
aggregate,  namely,  direct  wages,  plus  direct  material,  plus 
burden. 

Plant  Addition  Cost  Sheets  are  dealt  with  in  the  same  way  as 
Production  Sheets,  but  are  charged  to  a  Plant  Additions  account 
instead  of  a  Manufacturing  account. 

The  use  of  Standing  Order  Cost  Sheets  does  not  end  with  the 
grouping  of  service  cost  into  Departmental  Burden  accounts. 
They  are  also  tabulated  for  comparative  purposes  as  will  be  seen 
later.  In  fact  the  principal  object  of  the  subdivision  of  service 
costs  into  so  many  items  is  for  the  purpose  of  tabulation  and 
comparison.     This  will  be  considered  in  a  later  chapter. 

Production  Order  Cost  Sheets  go  on  accumulating  direct  wages, 
direct  material  and  burden  each  month,  until  the  work  they 
represent  has  been  completed  and  has  passed  out  of  the  shop. 
When  this  happens  a  credit  to  Manufacturing  account  equal  to 
the  entire  face  value  of  the  Cost  Sheet  takes  place.  Hence  the 
balance  in  Manufacturing  account  is  at  all  times  represented  by 
the  pile  of  live  Cost  Sheets.  Similarly  the  value  of  the  work  in 
process  in  any  department  is  equal  to  the  balance  in  that  depart- 
ment's Manufacturing  account.  And  the  value  of  any  particu- 
lar item  of  such  work  is  shown  by  the  corresponding  Production 
Order  Cost  Sheet.     Thus  we  have  three  things  that  are  identified : 

Actual  work  in  process  in  shop. 

Live  Cost  Sheets. 

Balance  in  Manufacturing  account. 

The  term  Production  Order  Cost  Sheets  has  been  used  largely 
in  this  chapter  to  the  exclusion  of  Component  Order  Cost  Sheetss 
But  what  is  true  of  one  is  true  of  the  other.  Component  Order, 
being  only  subdivisions  or  fractions  of  a  Production  Order,  their 
treatment  is  exactly  similar.     From  the  point  of  view  of  work 


278      MANUFACTURING  COSTS  AND  ACCOUNTS 

ng  through  the  shops,  that  is,  of  work  in  process,  there  is  no 
difference  between  one  kind  of  order  and  the  other.  Both  have 
to  be  charged  with  direct  wages,  and  direct  material,  both  have 
to  participate  in  the  distribution  of  burden,  both  have  to  be 
charged  to  Manufacturing  account.  If  it  takes  several  Compo- 
nent Orders  to  make  up  one  Production  Order,  that  is  a  matter 
that  has  significance  at  a  later  stage,  but  does  not  affect  the 
Mt  argument.  Therefore,  wherever  Production  Order  has 
been  mentioned  in  this  chapter,  Component  Order  may  be  sub- 
stituted for  it  without  altering  the  complexion  of  the  statements 
made. 


CHAPTER  XV 
COSTING 

In  the  foregoing  chapters  of  Part  II  the  various  books,  forms 
and  ledger  accounts  have  been  described  that  prepare  the  way 
for  costing  operations.  It  has  also  been  shown  that  all  costing 
operations  are  applied  to  orders,  and  that  the  mechanisms  by 
which  costs  are  identified  with  particular  orders  are  known  as 
Cost  Sheets. 

We  have  now  to  consider  the  forms,  books  and  ledger  accounts 
concerned  in  the  process  of  costing.  And  though  three  distinct 
methods  of  costing  are  to  be  described,  implying  considerable 
variation  in  the  actual  rulings  of  forms  and  blanks,  still  there 
will  be  in  general  a  very  similar  routine  to  be  gone  through,  be- 
cause the  elements  of  cost  are  the  same  in  all  three  methods  of 
applying  cost  to  orders.  These  elements  all  arise  in  the  same 
way,  and  are  indeed  identical  in  all  cases.  They  are  the  amounts 
that  have  been  heaped  up  in  the  ten  ledger  accounts  on  the  left- 
hand  side  of  the  general  diagram. 

In  all  varieties  of  costing  the  following  mechanisms  must  be 
set  up: 

1.  Departmental  Burden  accounts,  of  which  the  subdivisions 
are  Standing  Order  Cost  Sheets.  This  implies  a  method  of 
charging  indirect  material  and  indirect  wages  and  items  such 
as  depreciation,  etc.,  expended  on  Standing  Orders,  first,  and  as 
regards  the  totals,  to  Burden  account;  and  secondly,  as  regards 
the  individual  transactions,  to  Standing  Order  Cost  Sheets. 
These  two  sets  of  charges  must,  of  course,  agree,  the  latter  being 
only  the  subdivided  detail  of  the  former. 

2.  A  method  or  plan  by  which  departmental  burden,  so  col- 
lected in  Burden  account,  can  be  distributed  over  and  charged 
to  individual  Production  Order  Cost  Sheets  on  some  approved 
basis.  The  total  so  distributed  must  also  be  charged  to  Manu- 
facturing account.  This  total  and  the  aggregate  of  individual 
charges  to  Production  Order  Cost  Sheets  must,  of  course,  agree, 
inasmuch  as  the  latter  are  merely  the  subdivision  of  the  former. 

279 


280      MANUFACTURING  COSTS  AND  ACCOUNTS 

3.  Departmental  Manufacturing  accounts,  of  which  the  sub- 
divisions are  Production  Order  Cost  Sheets.  This  implies  a 
method  of  charging  direct  material,  and  direct  wages  first,  and 
as  regards  the  totals,  to  Manufacturing  account,  and  secondly 
as  regards  the  individual  transactions,  to  Production  Order 
Cost  Sheets. 

4.  In  some  cases,  a  separate  class  of  Production  Order  called 
Plant  Addition  Orders  will  be  in  use,  but  will  be  treated  exactly 
like  Production  Orders,  except  that  the  account  to  which  they 
are  charged,  and  of  which  their  Cost  Sheets  are  a  subdivision,  is 
termed  Plant  Additions  Manufacturing  account,  or  simply,  Plant 
Additions  account. 

When  these  mechanisms  have  been  set  up  and  operated,  Pro- 
duction Order  Cost  Sheets  will  contain  the  following: 

Direct  Wages  expended  on  the  order. 

Direct  material  used  on  the  order. 

A  share  of  the  monthly  expenditure  on  burden. 
Manufacturing  account  will  have  been  charged  with: 

Total  of  wages  expended  during  the  month  on  production. 

Total  of  material  expended  during  month  on  production. 

Total  of  all  other  wages,  material  and  expenses,  such  as 
depreciation,  etc.,  collected  first  in  a  Burden  account  and  then 
distributed  over  Production  Order  Cost  Sheets. 

In  carrying  out  these  operations,  two  journals  are  used,  one 
in  which  Standing  Orders  are  listed,  and  the  other  in  which 
Production  Orders  (and  Plant  Addition  Orders  where  in  use) 
are  listed.  These  journals  are  the  mediums  by  which  the  ten 
ledger  accounts  shown  at  the  left-hand  side  of  the  general 
diagram  are  credited.  At  this  point  various  agreements  are 
secured  which  prove  the  accuracy  of  the  work  up  to  the  point 
of  entry  on  Cost  Sheets. 

The  more  important  of  these  agreements  are  the  following: 

AGREEMENTS  SECURED  BY  BURDEN  JOURNAL 

1.  Total  of  stores  issued  to  Standing  Orders  is  agreed  with 
aggregate  of  individual  charges  of  stores  to  Standing  Order  Cost 
Sheets. 

2.  Total  of  li  ries  chargeable  on  pay-roll  to  Stand- 
ing <  Orders  is  agreed  with  aggregate  of  wages  and  salaries  charged 
to  individual  Standing  Order  Cost  Sheets. 


COSTING  281 

3.  Total  of  amount  shown  by  Depreciation  Schedule  as  charge- 
able against  the  department  is  agreed  with  aggregate  of  actual 
amounts  charged  to  Standing  Order  Cost  Sheets. 

4.  Totals  of  amounts  chargeable  by  other  schedules  is  agreed 
in  the  same  way. 

5.  Any  items  chargeable  in  the  nature  of  works  expense  to  the 
department  are  agreed  in  the  same  way. 

6.  Spoilage  chargeable  against  the  department  and  charged 
to  Standing  Orders  is  agreed  in  the  same  way. 

The  Burden  Journal  is  usually  arranged  so  that  a  column  is 
provided  for  each  department  (see  general  diagram)  but  in  some 
cases  a  separate  Burden  Journal  for  each  department  may  be 
used,  the  columnar  arrangement  being  merely  for  convenience. 

7.  Both  sides  of  the  journal  must,  of  course,  balance.  All 
the  credits  to  the  ten  ledger  accounts  must  balance  all  the  charges 
made  to  the  Departmental  Burden  accounts. 

These  operations  verify  the  correctness  of  the  postings  to  the 
Standing  Order  Cost  Sheets,  as  far  as  total  values  are  concerned 
(they  do  not,  of  course,  verify  the  posting  being  made  to  the  cor- 
rect individual  Cost  Sheet,  but  only  that  a  posting  of  the  proper 
amount  has  been  made  to  some  Cost  Sheet)  and  they  ensure  that 
burden  as  charged  in  the  Departmental  Burden  accounts  is 
equal  in  total  to  these  postings  on  the  one  hand  and  to  the  total 
of  expenditure  on  the  other. 

AGREEMENTS  SECURED  BY  MANUFACTURING  JOURNAL 

1.  Total  of  stores  issued  as  charged  on  Stores  Issued  Book  is 
agreed  with  aggregate  of  material  posted  to  individual  Produc- 
tion Order  Cost  Sheets. 

2.  Total  of  direct  wages  as  charged  on  pay-roll  to  Production 
Orders  is  agreed  with  aggregate  of  wages  posted  to  individual 
Production  Order  Cost  Sheets. 

3.  Total  of  departmental  burden  as  indicated  by  Burden 
account  balance  is  agreed  with  aggregate  of  burden  charged  to 
individual  Production  Order  Cost  Sheets. 

4.  In  a  few  cases  items  of  works  expense,  such  as  traveling 
expense  incurred  for  some  productive  purpose,  may  be  charge- 
able to  a  Production  Order  Cost  Sheet.  Such  charges  are 
totalled  and  verified  here. 

5.  Both  sides  of  the  journal  must,  of  course,  balance.     Credits 


282      MANUFACTURING  COSTS  AND  ACCOUNTS 

to  Stores  account,  Wages  account,  Works  Expense  account,  and 
Burden  account  must  equal  all  the  charges  to  Manufacturing 
ar<i unit  and  Plant  Additions  Manufacturing  account.  Some- 
times a  special  column  is  provided  for  charging  spoilage  (see 
general  diagram). 

These  operations  ensure  that  all  direct  wages  and  direct 
material  have  been  charged  to  a  Production  Order  Cost  Sheet 
(but  they  do  not  ensure  that  the  correct  individual  sheet  has  been 
1  and  they  ensure  that  the  total  of  charges  to  Production 
Order  Cost  Sheets  on  account  of  burden  equals  the  amount 
properly  chargeable  as  shown  by  the  Burden  account.  Similarly 
for  works  expense  items  when  they  exist. 

The  work  in  the  shops  represented  by  Production  Order  Cost 
Sheets  lias  now  been  costed.  Each  piece  of  work  having  been 
put  in  hand  by  virtue  of  a  Production  Order  number,  and  all 
direct  material  and  direct  wages  having  been  charged  to  that 
number,  and  again,  each  such  number  having  its  own  individual 
Cost  Sheet  to  which  these  material  and  wage  transactions  have 
posted,  it  follows  that  the  material  and  labor  cost  of  each 
piece  of  work  has  been  recorded.  And  the  extent  of  detail,  that 
is  the  size  of  the  individual  item  of  work  so  costed,  will  depend, 
as  was  shown  in  the  chapter  on  "Orders,"  on  the  way  in  which 
the  orders  have  been  made  out  in  the  first  case.  In  some  cases 
these  orders  will  represent  large  and  in  other  cases  small  lots. 
Again,  some  Production  Orders  are  subdivided  into  very  small 
each  such  lot  being  authorized  by  a  Component  Order,  which 
then  takes  the  place  in  all  costing  operations,  of  the  original 
Production  Order  from  which  it  is  derived.     The  Production 

<  >rder  then  serves  only  as  a  device  for  collecting  the  cost  of  the 
different  components  together  at  a  later  stage. 

But  in  addition  to  direct  wages  and  direct  material,  a  dis- 
tribution of  burden  has  taken  place  over  the  various  Production 

<  >rder  C<  -  -  (though  nothing  has  yet  been  said  of  the  basis 
on  which  Buch  distribution  is  undertaken),  so  that  as  a  matter 
of  fact,  our  individual  Production  Order  Cost  Sheets  now  show 
the  total  factory  cost  of  production.  That  is,  the  product  they 
represent  has  been  cot  i<  </. 

In  the  ensuing  chapter  three  ways  of  applying  burden  will  be 
described.  Though  two  of  them  will  differ  outwardly  in  a  con- 
siderable degree  from  the  process  described  in  this  chapter,  still 
in  the  main  the  principle  will  be  the  same,  namely,  that  burden  is 


COSTING  283 

first  ascertained,  amassed  or  collected;  secondly,  it  is  distributed 
in  some  way  or  other  over  Production  Orders  so  that  it  ceases  to 
exist  as  a  separate  entity,  or  in  other  words,  no  balance  is  left 
in  Burden  account.  In  the  first  variety  of  burden  distribution 
we  shall  consider  direct  wages  are  not  charged  to  orders.  All 
wages  are  treated  as  burden,  but  direct  material  remains  as  a 
direct  charge  to  Production  Orders.  In  the  second  variety,  the 
process  described  in  this  chapter  will  be  followed  very  closely. 
In  the  third  variety,  the  measurement  of  burden  applicable  to 
any  particular  Production  Order  is  effected  automatically  by 
means  of  a  device  known  as  a  machine  rate,  but  in  all  three  of 
them  the  student  will  do  well  to  keep  in  mind  the  fundamental 
process  of  costing  as  described  here. 


CHAPTER  XVI 
DEPARTMENTS 

Before  passing  to  consider  specific  methods  of  costing  it  may 
-  well  to  define  somewhat  more  formally,  than  has  been  done 
hitherto,  what  is  meant  by  a  department.  As  usually  employed 
the  term  has  a  somewhat  loose  significance.  It  may  mean  a 
building,  and  the  different  buildings  or  even  floors  of  a  plant  may 
be  referred  to  as  its  departments.  It  may  also  mean  a  kind  or 
division  of  activity,  as  when,  for  example,  we  speak  of  the  power 
department,  or,  in  non-engineering  industries,  the  repair  depart- 
ment, the  latter  being  commonly  a  machine  shop  forming  the 
headquarters  of  the  repair  staff.  There  is  also  a  stores  department 
in  most  plants,  and  this  may  or  may  not  be  identified  with  a  single 
building.  Then,  again,  different  productive  shops  are  called 
departments,  and  it  sometimes  happens  that  more  than  one  such 
productive  department  is  covered  by  the  same  roof. 

It  is  necessary,  therefore,  to  define  the  sense  in  which  the  term 
is  used  in  this  work.  Such  terms  as  cash  department,  purchasing 
depart  iiieni ,  pay  department  have  no  other  signification  than  to 
indicate  clerical  work  connected  with  cash,  purchase  and  pay 
ctively.  Stores  department  where  used  means  the  whole 
;n  of  handling,  pricing,  receiving  and  issuing  stores,  and  the 
keeping  of  the  records  pertaining  to  them.  It  means  in  fact  all 
thai  class  of  activity  that  is  supervised  by  a  storekeeper. 

The  cos!  department  similarly  means  all  that  activity  presided 
■  »y  a  cos!  accountant. 

The  power  department  includes  all  activity  relating  to  the 
ration  and  transmission  of  power,  and  commonly  also  of 
heating  and  lidiiin.Lr  the  premises. 

All  1  li«  :pense  or  service  departments,  and  the  cost  of 

conducting  them  finds  its  way  to  Standing  Orders  as  explained 
inChap.XIl    Pari  II  i  and  ror  laler  becomes  partof  burden, 

to  be  distributed  over  Production  Orders. 

Bui  as  will  be  oon  as  we  discuss  the  question  of  the 

methods  of  distributing  burden,  the  latter  must  first  be  depart- 

284 


DEPARTMENTS  285 

mentalized,  that  is  distributed  to  productive  departments,  before 
it  is  distributed  to  the  various  Production  Order  Cost  Sheets 
representing  work  within  those  departments.  It  is,  therefore, 
necessary  to  define  what  a  productive  department  really  signifies. 

A  productive  department  may  be  defined  as  any  homogeneous 
group  of  productive  activity.  The  division  may  be  based  on  the 
type  of  processes  carried  on  in  the  plant,  as,  for  example,  the 
cupolas  of  a  foundry,  the  folding  room  of  an  envelope  factory, 
the  kettle  floor  of  a  soap  works,  the  tempering  house  of  an  armor 
plant,  the  cutting  room  of  a  shoe  factory,  or  the  milling  machine 
department  of  an  engineering  shop.  These  are  examples  of 
simple  departments  based  on  processes.  But  in  other  cases  the 
division  into  departments  may  be  based  on  the  nature  of  the 
product  rather  than  on  the  nature  of  the  process.  Thus  we  may 
have  an  aeroplane  department  and  a  high-speed  engine  depart- 
ment. But,  in  general,  departments  organized  on  the  nature 
of  the  product  are  in  effect  separate  factories,  and  might  them- 
selves be  divided  up  into  process  departments. 

The  more  homogeneous  the  activity  in  a  department,  that  is 
to  say  the  less  variety  in  the  kind  of  processes  it  employs,  the 
more  perfect  from  a  cost-keeping  viewpoint  is  its  departmental- 
ization, and  the  simpler  are  the  methods  necessary  to  cost  its 
product.  The  more  various  sizes  of  machine,  men  at  different 
rates  of  wages,  and  different  varieties  of  product  are  included 
in  one  department  the  more  complex  and  difficult  will  costing 
become. 

The  aim,  therefore,  should  be  to  split  up  productive  activity 
into  as  many  departments  as  are  naturally  indicated  by  the  nature 
of  the  processes  and  product.  And  for  this  purpose  it  may  often 
be  necessary  to  consider  one  building  as  containing  several  depart- 
ments. This  procedure,  it  is  true,  introduces  troubles  of  its 
own,  as,  for  example,  the  cost  of  maintaining  and  repairing  the 
building,  and  depreciation  on  it,  has  to  be  divided  between  the 
departments.  But  this  can  be  done  on  a  percentage  basis  fixed 
once  for  all,  while  on  the  other  hand  the  gain  in  clearness  of  per- 
ception as  to  the  cost  of  processes  may  be  worth  many  times  the 
trouble  involved. 

Productive  departments  may  be  defined,  therefore,  as  the  natural 
process  divisions  of  the  business.  In  many  businesses  depart- 
ments and  buildings  or  departments  and  floors  will  be  coincident, 
but  it  will  often  happen  otherwise.     The  departments  will  then 


286      MANUFACTURING  COSTS  AND  ACCOUNTS 

have  the  appearance  of  being  somewhat  arbitrary  and  artificial, 
but  if  the  division  is  skilfully  carried  out,  this  will  be  the  reverse 
of  the  truth.  Departments  and  the  physical  arrangement  of 
them  in  buildings  should  coincide,  but  for  practical  reasons  it 
cannot  always  be  done.  That  should  not  prevent  its  being  done 
in  the  accounting. 


CHAPTER  XVII 

COSTING  ON    METHOD  A  (DEPARTMENT  HOUR-COST 

METHOD) 

The  general  principles  of  costing  by  Method  A  have  been 
discussed  in  Part  I,  Chap.  V.  In  the  present  chapter  the 
actual  blanks  and  accounts  necessary  to  practise  the  method 
will  be  described. 

There  are  two  variants  of  this  method,  one  in  which  the 
division  of  cost  between  products,  if  there  is  more  than  one,  is 
on  the  basis  of  the  relative  output  of  each  product;  and  the 
other  in  which  the  division  of  cost  is  based  on  the  time  occupied 
by  each  product  in  passing  through  the  different  stages  of 
manufacture.  In  the  latter  case  Production  Orders  are  usually 
issued  covering  definite  lots  or  batches  of  product. 

As  explained  in  the  chapter  above  referred  to,  this  method 
of  costing  depends  for  its  validity  on  there  being  no  substantial 
difference  in  wage  rates  between  operatives  engaged  in  any  one 
department.  This  being  assumed,  then  it  is  obvious  that  no 
advantage  is  gained  by  recording  direct  wages  against  each 
Production  Order,  since  each  item  would  be  alike,  or  in  simple 
proportion  to  time  occupied  on  the  job.  And  as  burden  is  also 
considered,  on  this  method,  to  be  distributable  on  a  time  basis, 
it  follows  that  direct  wages  and  burden  may  be  combined  and 
charged  to  orders  on  a  time  basis  as  a  single  item.  The  only 
thing  left  to  be  identified  with  individual  orders  is  direct  material. 

This  means  that  if  we  have  a  manufacturing  plant  containing, 
say  five  departments,  then,  material  being  charged  to  the  order 
directly,  each  of  the  five  departments'  work  will  be  reduced 
to  single  charges  per  hour,  and  the  departmental  cost  of  any 
job  is  known  when  we  know  how  many  hours  it  has  taken  to 
perform  the  work  on  it  in  each  department. 

The  simplest  case  is  where  only  one  product  is  being  turned 
out,  perfectly  uniform  in  character.  In  this  case  our  time 
unit  may  be  a  month,  and  the  departmental  cost  for  the  month 

287 


MANUFACTURING  COSTS  AND  ACCOUNTS 

divided  by  the  tonnage  or  other  measure  of  product  will  give 
us  the  departmental  cost  per  ton  or  other  unit. 

The   next    simplest  case  is  where  two  or  more  products  are 

being  turned  out,  cadi  of  which  is  known  to  be  produced  at 

same  rate  of  production,  in  which  case  division  of  total  cost 

between  the  different  products  will  obviously  be  in  proportion  to 

the  total  output  of  each. 

The  third  case  is  where  two  or  more  products  are  being  turned 
out,  each  of  which  has  its  own  rate  of  production.  This  is  a 
more  complex  matter  than  the  foregoing,  since  a  record  has  to 
be  made  of  the  time  occupied  by  each  product.  The  depart- 
mental cost  has  then  to  be  reduced  to  an  hourly  rate,  and  the 
time  taken  by  each  product  multiplied  by  this  hourly  rate  in 
order  to  find  the  value  of  the  total  time  consumed  each  month 
on  each  product.  Then  each  product's  total  cost  must  be 
divided  by  its  tonnage,  etc.,  so  that  a  cost  per  pound,  etc.  may 
be  found. 

A  fourth  case  is  where  either  one  or  several  varieties  of  prod- 
uct are  put  through  in  limited  lots.  In  all  the  former  cases 
we  have  assumed  a  uniformity  in  each  product  so  that  any 
fraction  of  it  was  indistinguishable  from  any  other  fraction, 
several  varieties  of  soap,  for  example.  Now,  however,  we  have 
to  deal  with  a  case  in  which  differences  may  exist  between 
1  latches  of  product,  as  for  example,  lots  of  articles  differing 
slightly  from  one  another  in  their  demands  on  the  operative 
work  of  the  department.  Production  Orders  are  then  issued 
for  each  such  batch  or  lot,  and  the  time  of  operation  is  also 
recorded.  This  time  multiplied  by  the  cost  of  the  departmental 
hour  gives  the  departmental  cost  of  the  batch. 

The   simplicity  of  this   method   of  costing  is  really  not  so 

as  it  appears.     The  cost  of  product,  it  is  true,  is  very 

simple,   being  confined   to  a  record   (1)   of  the  direct  material 

used  "ii  each   Production  Order,  and  (2)  a  record  of  the  time 

■   by  each  order  in  each   department.     One  of  the  great 

advantages  of  the  method  is  that  if  we  can  forecast  the  time 

which  should  be  taken  to  do  any  variety  of  departmental  work, 

multiplying  this   time  by   the  cost  of  the  departmental  hour 

idea,  of  the  cost  of  the  operation.     For  esti- 

mating  purposi  -  this  is  sod  etimes  very  useful. 

On  the  other  hand,  the  necessity  of  recording  cost  of  service 
Mill  remain-,  and  as  service  is  made  up  of  many  small  items  it 


COSTING  ON  METHOD  A  289 

is  still  necessary  to  set  up  a  cost  mechanism  to  take  care  of  it. 
In  small  plants,  it  is  true  that  even  this  is  hardly  necessary, 
since  only  a  few  men  will  be  engaged  on  service  work,  and  no 
elaborate  record  need  be  made  for  the  purpose  of  controlling 
their  work.  But  if  the  plant  is  of  any  considerable  size,  the 
adoption  of  a  simple  system  of  costing  Production  Orders  does 
not  in  the  least  obviate  the  necessity  for  closely  watching  ex- 
penditure on  service.  Accuracy  and  facility  of  control  must 
not  be  sacrificed  to  simplicity,  and  apparent  economy  in  the 
making  of  cost  records  may  be  in  reality  highly  wasteful,  if  it 
enables  small  inefficiencies  to  slip  by  day  after  day,  and  month 
after  month. 

It  will  be  assumed,  therefore,  that  the  plant  is  not  so  small 
that  it  can  afford  to  neglect  the  control  of  service  or  burden 
expenditure,  and  this  implies  that  a  cost  system  must  be  suf- 
ficiently developed  to  record  material  and  time  on  Standing 
Orders  in  some  detail,  though  as  the  industries  to  which  this 
method  can  be  successfully  applied  are  not  in  general  so  highly 
organized  as  those  of  the  engineering  type,  a  somewhat  simpler 
and  more  elementary  Standing  Order  system  can  usually  be 
adopted  with  safety. 

In  any  cost  method  certain  stages  have  to  be  gone  through, 
and  these  may  be  summarized  as  follows: 

1.  Distribution  of  material  cost  to  Standing  and  Production 
Orders. 

2.  Distribution  of  wages  to  Standing  and  Production  Orders. 

3.  Collection  of  Standing  Order  costs  and  their  distribution  to 
Departmental  Burden. 

4.  Listing  of  Production  Order  costs,  and  distribution  of 
Departmental  Burden  over  them. 

5.  Charging  of  Production  Order  costs  plus  burden  to  De- 
partmental Manufacturing  account,  and  crediting  of  the  elements 
of  such  cost  to  the  ten  ledger  accounts  on  left-hand  side  of 
general  diagram. 

Figure  67  (p.  310)  is  a  general  diagram  for  Method  A.  It  re- 
places the  central  part  of  the  large  folding  general  diagram, 
which  is  arranged  for  Method  B.  In  Fig.  67,  the  ten  ledger  ac- 
counts are  shown  at  the  left-hand  side  as  before,  except  that  the 
account  for  patterns  has  been  omitted.  The  depreciation  and 
other  schedules  are  also  shown  as  before.  The  remainder  of  the 
diagram  is  special  to  Method  A  and  shows  the  whole  course  of 

19 


290      MANUFACTURING  COSTS  AND  ACCOUNTS 

operations,  from  the  crediting  of  the  purchased  items  on  the 
left  to  the  charging  of  Departmental  Manufacturing  accounts 
on  the  right. 

The  crediting  of  Departmental  Manufacturing  accounts 
with  the  values  of  finished  product  being  the  same  whatever 
method  of  costing  is  employed,  will  form  the  subject  of  a  separate 
chapter,  after  the  three  methods,  A,  B,  andC  have  been  described. 
The  Order  System. — As  all  costing  operations  depend  on  the 
way  in  which  the  order  system  has  been  laid  out,  it  will  be  well 
to  begin  by  discussing  Standing  Orders  and  Production  Orders. 
Fig.  68  shows  a  suggested  scheme  of  Standing  Orders  suitable 
for  plants  using  Method  A.  The  grouping  by  production  factors 
mentioned  in  Chap.  XII  (Part  II)  has  not  been  followed,  though 
t  hi<,  of  course,  is  optional.  In  a  large  plant  it  might  be  advisable 
to  use  it,  but  Method  A  is  not  often  applied  to  large  plants. 
Three  service  departments  are  indicated,  namely,  one  grouping 
the  office  force,  costs,  pay,  etc.,  the  superintendent's  staff,  and 
all  production  men,  tracers,  etc.;  the  second  takes  care  of  all 
storekeeping  officials,  truckers  and  handlers,  and  so  forth;  the 
third  represents  the  power-plant  men.  These  three  departments 
are  obviously  expense  departments,  and  have  to  be  prorated 
some  time  or  other  over  the  productive  departments  in  propor- 
tion to  the  assumed  call  of  the  latter  on  their  services.  Three 
productive  departments,  4,  5,  and  6,  are  also  shown,  with 
Standing  Order  numbers  arranged  to  collect  the  usual  items  of 
expense  in  each  such  department.  This  scheme  will,  naturally, 
need  modifying  in  some  particulars  in  many  cases. 

regards  Production  Orders,  it  is  assumed  that  there  is  more 
than  one  product  passing  through  departments  during  the  cost- 
ing period.  Consequently,  a  series  of  Production  Orders  is 
required.  These  usually  may  very  well  be  of  the  waybill  or  strip- 
tick<  Fig.  60)  described  in  Chap.  XIII  (Part  II).     They 

will  hi-  issued  ami  registered  as  described  in  that  chapter.  Such 
Production  Orders  may  represent  either  the  month's  production 
of  dim-rent  kind-  of  product,  or  they  may  represent  individual 
of  on"  or  Beveral  kinds  of  product.  If  only  one  kind  of 
product  of  ;i  homogeneous  character  was  being  made,  then  only 
one  m<h  Production  Order  would  lie  required  each  month,  to 

.Me  the  cos!  of  the  whole  month's  product.  In  that  case, 
of  course,  no  actual  order  would  be  necessary,  but  a  number 
representing  il  might  he  used  for  office  purposes. 


COSTING  ON  METHOD  A 


291 


EXPENSE  ITEM 

o  a 
O  "> 

-a 

U 

o 

V 

O 
Oh 

-3 
O 

a-, 

-a 
o 

•6 
o 

M 
PL, 

Depreciation 

100 

200 

300 

400 

500 

600 

Insurance 

101 

201 

301 

401 

501 

601 

Rents  &  Taxes 

102 

202 

302 

402 

502 

602 

Buildings   Repairs   Labor 

110 

210 

310 

410 

510 

610 

"                    •'           Material 

112 

212 

312 

412 

512 

612 

Machinery  Repairs   Labor 

313 

413 

513 

613 

.»                    »           Material 

314 

4l4    . 

614 

614 

Other   Repairs,  Labor 

115 

215 

315 

415 

515 

615 

"              <>        Material 

116 

216 

316 

416 

516 

616 

Labor,  Trucking  &    Handling 

220 

420 

520 

620 

•  i         Cleaning    &   Laboring 

121 

221 

321 

421 

521 

621 

•  >         Watchman  etc 

122 

Sundry    Supplies 

123 

223 

328 

423 

523 

623 

Labor  Power  Staff 

330 

Fuel  &  Feed    Water 

331 

Sundry   Power  Supplies 

332 

Salaries.  Supt.  &   Prod.  Staff 

140 

"           Foremen 

441 

541 

641 

"           Storekeeping 

342 

"           All   Office  Men 

143 

Office  Expense 

144 

Sundry   Office  Supplies 

145 

Sundry  Works   Expense 

116 

246 

346 

446 

546 

646 

Spoilage  &    Wastes 

450 

550 

550 

Fig.  68. — Standing  Orders. 


292      MANUFACTURING  COSTS  AND  ACCOUNTS 

Distribution  of  Material. — Material  will  be  issued  and  charged 
against  Standing  Orders  and  Production  Orders  as  described  in 
Chap.  IV  (Part  II).  When  required  for  Standing  Orders  it  will 
<ued  against  a  Stores  Requisition  (Fig.  37)  and  when  for  a 
Production  Order  it  will  be  usually  issued  against  a  Bill  of 
Material,  which  is  a  list  of  stores  required  on  any  Production 
Order.  When  the  issues  thus  made  are  priced  out  they  are 
entered  on  a  Stores  Issues  Book  (Fig.  69)  either  in  detail  or 
summary.  Bills  of  Material  will  be,  in  general  entered  as  one 
item,  while  requisitions  against  Standing  Orders  will  be  entered 
singly.  The  sectional  form  of  Stores  Issue  Sheet  (Fig.  39)  will 
not  usually  be  necessary  in  costing  on  Method  A  as  stores 
transactions  are  few.     Ordinary  posting  will  serve  all  purposes. 

When  the  Stores  Issue  Book  is  entered  up,  as  regards  the  item, 
quantity,  price  and  value  of  the  issue,  an  allocation  is  made  to 


Ref. 
No. 


Qty  ? 


Charge 

to 

Order  No 


Fuel  &. 
Feed 
Water 

8.0.331 


finndrv  Office 

Sundry     SuppUe8 
Power    |        & 
Supplies  Stationery 
S.O.332   I  S. 0.145 


Other 

Standing 

Orders 


Direct 

ilat'l.to 

Prod. 

Order 


Fig.  69. — Stores  Issues  Book  (Method  A). 
(The  totals  of  columns  SO.  331,  332  and  145  are  charged  direct  on  Burden 
Journal  without  an  intermediate  cost  sheet.) 


one  of  several  columns  so  as  to  indicate  the  destination  of  the 
item.  Fig.  69  shows  a  convenient  form  of  Stores  Issues  Book. 
Columns  are  provided  for  issues  against  Production  Orders,  also 
against  Standing  Orders,  but  three  special  columns  are  also  pro- 
vided to  take  care  of  the  allocations  to  Standing  Orders  145,  331 
and  332,  representing  power  department  and  office  department 
respectively.     The  reason  of  this  will  be  given  later. 

The  document-  from  which  Stores  Issues  Book  has  been  written 
up  are  thru  available  for  posting  to  Cost  Sheets.  Every  item 
in  the  Production  Order  column  must  be  posted  to  its  proper 
M.iiirial  Sheet  (Fig.  70).  Every  item  in  the  column  headed 
"  '  rther  Standing  <  Orders"  must  be  posted  to  the  proper  Standing 
( >rder  ( lost  Sheel  1  ig.  73),  while  the  items  in  the  three  remaining 
columns  are  dealt  with  later,  as  no  Cost  Sheets  need  be  made 
out  for  them.  This,  however,  is  merely  a  "short  cut,"  and  if 
•  hnred  Cost  Sheets  can  be  made  out  for  Standing  Orders  145,  331 


COSTING  ON  METHOD  A 


293 


and  332,  in  which  case  these  columns  would  be  omitted  from  the 
book,  and  all  Standing  Order  material  posted  to  Cost  Sheets  in 
the  same  manner. 

When  this  operation  has  been  carried  out,  the  cost  of  all 
material  issued  will  have  been  posted  to  some  Cost  Sheet  or  other, 
(except  that  chargeable  against  the  three  numbers  just  men- 
tioned) and  consequently  if  we  were  to  list  all  our  postings  to 
Cost  Sheets,  the  total  would  equal  the  total  of  the  issues  of  stores 
for  the  period.  In  other  words,  we  have  now  obtained  a  separate 
account  of  stores  issued  against  each  Standing  and  Production 
Order  on  which  we  are  working  at  this  time.  Methods  of  verify- 
ing that  this  is  so,  and  for  crediting  Stores  account  with  the 
values  thus  withdrawn  from  stores,  will  be  described  presently. 


For 

PRODUCTION   ORDER  COST  SHEET 
Otv. 

No 

MATERIAL 

Date 

Item 

Ref.No. 

Qty.  or  Wt. 

Price 

Value 

~ ^ 

Total 

Fig.  70. — Production  Order  Cost  Sheet  for  material. 


Distribution  of  Wages. — In  Method  A  no  complications  with 
piecework  will  occur,  as  the  method  is  not  correct  if  piecework 
is  employed.  The  principle  of  the  method  rests  on  uniformity 
of  wage  rates  within  departments  on  equivalent  processes,  as 
already  explained,  consequently  no  method  of  payment  which 
would  make  earnings  unequal  can  be  employed.  Gate  time,  as 
explained  in  Chap.  IX  (Part  II)  is,  therefore,  the  foundation  of  the 
pay-roll,  and  as  under  this  method  all  operatives'  time  (men 
engaged  on  process  work)  is  charged  to  Burden  account,  and  not 
to  Production  Orders,  we  do  not  require  any  additional  mechan- 
ism for  distributing  wages  to  Orders  save  in  the  case  of  certain 
men,  mostly  of  the  repair  staff  whose  work  may  be  directed  now 
to  the  benefit  of  one  department  and  now  of  another.     Such  men, 


294      MANUFACTURING  COSTS  AND  ACCOUNTS 


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.11           1          1 

COSTING  ON  METHOD  A  295 

therefore,  require  time  sheets;  all  the  others  are  simply  entered 
on  the  pay-roll  under  I  he  routine  givenin  Chap.  IX,  and  entries  in 
Burden  Journal  are  made  direct  from  the  data  given  there.  Fig. 
71  shows  a  suitable  pay-roll  for  Method  A.  This  is  arranged  on 
the  weekly  plan,  since  the  nature  of  the  work  for  which  this 
method  can  alone  be  used  is  usually  that  of  steady  progress  of 
large  or  even  continuous  lots,  so  that  the  necessity  for  quick  and 
prompt  control  of  costs  is  rarely  present.  Of  course,  if  desired, 
a  daily  pay-roll  like  Fig.  52  can  be  employed,  but  in  that  case  a 
summary  must  be  made  somewhat  in  the  form  of  Fig.  71  each 
week. 

With  one  exception,  all  wages  are  chargeable  to  Burden  account 
without  further  subdivision  or  classification.  This  exception  is 
the  case  of  the  repair  men,  laborers,  etc.,  who  may  divide  their 
time  between  departments.  Such  men's  wages  are,  therefore,  all 
allocated  to  the  column  headed  "  Time  Sheet  Men."  Next  comes 
a  column  for  power  staff  wages,  then  three  columns  to  take  care 
of  operatives'  wages,  each  productive  department  being  listed 
separately.  A  salaries  division  is  also  shown,  though  this,  of 
course,  can  be  arranged  in  a  separate  book  if  desired.  Columns 
are  provided  for  superintendent  and  production  staff,  for  the 
foremen  of  the  three  productive  departments,  for  storekeeping 
staff,  and  for  office  staff.  The  remarks  made  as  to  Stores  Issues 
Book  apply  here  also.  Instead  of  having  separate  columns  as 
shown,  each  man's  time  could  be  posted  to  its  proper  Standing 
Order  number  on  a  Cost  Sheet,  and  in  this  case  there  would 
only  be  four  columns,  namely,  three  for  operative  department 
wages,  and  one  for  Time  Sheet  men,  and  each  man  would  have 
to  use  a  Time  Sheet,  and  these  Time  Sheets  would  be  posted  to 
the  Standing  Orders.  The  method  shown  is  a  short  cut  justifiable 
in  view  of  what  might  be  termed  the  comparatively  sluggish 
circulation  of  work  in  a  plant  likely  to  be  organized  on  Method 
A.     Very  detailed  accounts  are  out  of  place  in  such  a  condition. 

Repair  men  and  laborers  who  divide  their  time  between 
departments  will  have  Time  Sheets  like  Fig.  72.  These  are 
arranged  for  weekly  return.  In  general  this  will  be  found 
sufficient.  The  division  of  time  between  departments  will  be 
only  approximately  correct,  but  this  will  depend  a  good  deal 
on  the  supervision  exercised.  A  daily  return  of  time  distribution, 
to  be  used  in  connection  with  a  daily  pay-roll,  as  will  be  de- 
scribed in  connection  with  Method  B,  can  be  used  if  desired,  but 


296      MANUFACTURING  COSTS  AND  ACCOUNTS 

will  not  in  general  be  worth  the  expense  incurred  where  Method 
A  is  in  use.  The  Time  Sheet  when  made  up  and  checked  against 
gate  time,  is  extended  into  money,  which  must  agree  exactly 
with  the  amount  entered  on  pay-roll.  Each  line  of  the  Time 
Sheet  will  represent  a  charge  to  be  made  against  a  Standing 
Order,  and  consequently  must  be  separately  posted  to  Standing 
Order  Cost  Sheets.  When  all  postings  have  been  made,  the 
result  would  be,  if  we  listed  all  such  postings,  that  all  the  wrages 
appearing  under  the  column  headed  "Time  Sheet  Men"  would 
be  charged  up  on  one  or  other  of  the  Standing  Order  Cost  Sheets. 
These  postings,  added  to  the  amounts  shown  in  the  other  allo- 
cation columns  of  the  pay-roll  would  then  equal  in  amount  the 


Man's  Name 

w 

R. 

Man's  Xo. 

Standing 

Order 

Number 

Work 

Thu 

Fri. 

Sat. 

Sun. 

Mon 

Tue 

Wed 

Hrs. 

Wages. 

' 

Fig.  72. — Time  Sheet  for  men  working  on  repairs  and  other  standing  orders 

(Method  A). 


wages  and  salaries  paid  for  the  period.  Methods  of  verifying 
this  and  securing  the  proper  credits  to  wages  and  salaries  accounts 
will  be  described  presently. 

Collecting  Standing  Order  Costs  and  Charging  Them  to 
Departmental  Burden. — While  Standing  Order  Cost  Sheets 
could  be  issued  to  cover  all  the  Standing  Order  numbers  shown 
in  Fig.  68,  in  practice  this  will  not  be  necessary.  Cost  Sheets 
will  only  be  issued  for  such  Standing  Orders  as  are  worked  on  by 
Time  Sheet  men.  that  is  to  say,  by  men  such  as  repair  men  and 
Laborers,  who  divide  their  time  between  departments  and 
different  kinds  of  work.  All  other  Standing  Orders  are  provided 
for,  either  by  the  classifications  in  the  Depreciation,  etc.,  Sched- 
ule- or  by  special  columns  in  the  Stores  Issues  and  Wages  Books. 


COSTING  ON  METHOD  A 


297 


Fig.  73  shows  a  Standing  Order  Cost  Sheet,  providing  columns 
for  material  (as  allocated  to  the  column,  "Other  Standing 
Orders"  in  Stores  Issues  Book);  for  wages  (as  allocated  to  the 
column  "Time  Sheet  Men"  in  pay-roll);  and  for  works  expense, 
namely,  sundry  items  which  have  been  charged  to  Works  Ex- 
pense account,  and  which  are  chargeable  against  building  repair 
or  some  such  item.  As  such  items  will  be  very  few  no  special 
mechanism  is  necessary  to  list  them.  They  will  be  picked  out 
of  the  ledger  account,  and  posted  to  Cost  Sheets,  until  all  the 
items  in  the  account  are  exhausted,  except  as  provided  below. 
At  the  end  of  each  month,  the  Cost  Sheet  will  be  totalled  up, 
and  a  fresh  sheet  bearing  the  same  number  opened  to  take  care 
of  the  next  month's  charges. 


STANDING  ORDER  COST  SHEET 
Tiertt 

Nn. 

Date 

Item 

Mat'l. 

Wages 

Works 
Exp. 

Total 

Fig.  73. — Cost  Sheet  for  standing  orders  (Method  A). 


The  Burden  Journal,  Fig.  74,  is  the  medium  by  which  credits 
are  made  to  the  main  ledger  accounts  on  the  left  of  the  diagram, 
and  charges  are  made  to  the  Productive  Departments  Burden 
accounts.  In  this  journal  on  Method  A  all  the  elements  of 
manufacturing  cost  are  collected  with  the  exception  of  direct 
material,  as  it  will  be  remembered  that,  on  this  method,  opera- 
tives wages  are  considered  part  of  departmental  burden.  The 
journal  also  provides  a  mechanism  for  prorating  the  cost  of  the 
non-productive  departments  over  the  productive  departments 
on  approved  bases  of  allocation. 

The  sources  of  the  various  entries  to  be  made  on  this  journal 
will  be  understood  from  an  inspection  of  Fig.  74,  in  which 
they  are  enumerated.  Depreciation,  rents,  insurance,  etc.,  will 
be   taken   from   the   schedules,    already   divided   into   separate 


298      MANUFACTURING  COSTS  AND  ACCOUNTS 


U 

O 

u 

S 

o 
C4 

o 

& 

CO 

5* 

1 
0. 
C/3 

Expense  Item 

Depreciation                                            J 

Insurance                                                \ 

Rents  &  Taxes                                      \ 

Building  Repairs  Labor                     / 

"         Material                 \ 

\/ 

Machinery    Repairs   Labor                  / 

\/ 

"     '             "      .'  Material             \ 

• 

Other   Repairs  Labor                            ^ 

>>              >>        Material                       / 

Labor,  Trucking  &  Handling 

Cleaning   &   Laboring       \ 

>•          Watchmen   etc.                      ( 

Sundry  Supplies                                     \ 

v/ 

Labor  Power   Staff 

Fuel    &    Feed   Water 

Sundry  Power   Supplies                      j 

Salaries   Supt.  &   Prod.  Staff 

"          Foremen                                     \ 

Storekeeping                            j 

All   Office  Men                      / 

Office  Expense                                     / 

Sundry   Office   Supplies 

Sundry   Works   Expense 

v/ 

Spoilages   &    Waste 

\ 

Operatives    Wages                         / 

Totals  to    be  Credited                          \ 

'Left) 


FlG.   74. — Burden 
Note. — The  check  marks  (vO  indicate 


COSTING  ON  Ml.THOD  A 


299 


Expense 
Depts 

Productive 
Depts 

)                             irer 

1 

Office 

& 
Supt 

2 
Stores 

3 

Power 

4 

5 

6 

)         Schedule   for    Month 

I          Schedule   for   Month 

Schedule   for    Month 

/         Service   Cost   Sheets 

\ 

, 

,. 

,. 

„ 

„ 

] 

,. 

\                    ,, 

/     As   Pay  Roll    A 

location 

As  Stores   Issues   Book 

.. 

( 

As   Pay  Roll    Allocation 

\ 

„ 

1 

1 

/        As   Charged  in   Wks.  Exp.  Acct. 

As  Stores   Issues    Book 

As  Charged  in -Acct. 

.       As  Charged  in  Acct. 

1       >.            >>         •> 

/      As   Pay  Roll    Allocation 

X 

X 

>< 

\           Prorating    of    Office    &c 

/                    Prorating    of    Stores 

Dept. 

\                             Prorating    of    Power   I 

)ept. 

Charge    to    P 

roducti 

ve    De 

ptS. 

(Right) 

Journal  (Method  A). 

the  usual  allocations  in  credit  columns. 


300      MANUFACTURING  COSTS  AND  ACCOUNTS 

charges  against  each  of  the  six  departments.  Repairing  and 
laboring  items  will  be  taken  from  the  Standing  Order  Cost 
Sheets.  Power  staff  labor  will  be  taken  from  the  proper  column 
in  the  pay-roll.  Fuel,  feed  water  and  power  supplies  will  be 
found  in  the  columns  in  Stores  Issues  Book  appropriated  to 
those  items.  Various  items  of  salaries  will  also  be  taken  from 
the  respective  columns  in  the  pay-roll.  Sundry  office  expense 
will  be  taken  from  the  entries  in  the  Works  Expense  account,  as 
will  also  any  special  items  chargeable  against  departments 
and  not  covered  either  by  Standing  Order  Cost  Sheets  or  by  the 
above  office  expense  time.  Finally,  spoilages  and  wastes  will 
be  charged  to  the  various  departments  that  are  chargeable  with 
them.  The  distribution  of  the  total  in  Spoilages  account  will  be, 
in  general,  authorized  by  a  memorandum  from  the  superin- 
tendent, classifying  such  charges  and  allotting  the  departmental 
responsibility.  The  total  covered  by  this  memorandum  will, 
of  course,  agree  with  the  balance  in  Spoilage  account  at  the 
month  end. 

On  the  left  side  of  the  Burden  Journal,  columns  are  provided 
for  collecting  the  credits  to  be  made  to  the  main  ledger  accounts. 
On  the  right-hand  side  a  column  is  provided  for  each  of  the 
departments,  and  at  the  bottom  of  the  three  service  or  non- 
productive department  columns,  a  prorating  arrangement  will 
be  observed,  by  which  each  department's  total  can  be  distributed 
over  the  productive  departments. 

It  must,  of  course,  be  understood  that  separate  ledger  accounts 
could  be  set  up  for  collecting  the  departmental  cost  of  non- 
productive departments,  and  then  the  balances  in  these  accounts 
could  be  made  the  subject  of  journal  entries  so  that  each  balance 
was  prorated  over  the  three  productive  departments.  In 
most  cases  there  is  no  advantage  in  this  course,  which  entails 
extra  work  without  any  corresponding  advantage.  Generally 
speaking,  there  i<  but  little  advantage  in  setting  up  a  ledger 
account  unless  it  is  expected  to  carry  a  balance  at  some  time  or 
(.tier,  or  unless,  as  in  the  case  of  Works  Wages  account,  Salaries 
account,  and  Borne  ethers,  it  represents  some  definite  stage  in  the 
gradual  process  of  transforming  cash  and  credit  into  finished 
goods.  Accounts  are  set  up  for  depart  mental  burden  in  product- 
lepartments  because  such  burden  is  not  always  distributed 
in  full,  or  may  even  be  over-distributed  as  we  shall  see  presently. 
The  matter  is,   however,  one  of  option  and  many  accountants 


COSTING  ON  METHOD  A  301 

prefer  to  multiply  ledger  accounts  rather  than  to  shorten  the 
process  of  charges  and  credits  by  short-circuiting  accounts  that 
have  no  balances  in  them.  This  is  often  due  to  a  desire  to 
preserve  a  record  of  certain  classes  of  transaction,  as  for  ex- 
ample, the  totals  of  the  expenditure  in  the  three  non-productive 
departments  shown  in  Fig.  74.  But  such  records  exist  on  the 
face  of  the  journal  as  indicated,  and  no  additional  security  or 
worth  is  attained  by  putting  such  items  in  and  out  of  ledger 
accounts  each  month.  If  unexpected  varieties  of  charge  are 
feared,  not  foreseeable  by  the  designer  of  such  a  journal,  they 
can  be  provided  against  by  leaving  a  few  blank  lines,  and  a 
blank  column  on  the  left-hand  side  of  the  journal,  so  that  credits 
may  be  made  from  it  to  any  account,  and  any  kind  of  item 
entered  on  it  and  charged  to  any  department. 

The  basis  on  which  the  non-productive  department  totals  are 
prorated  over  the  productive  departments  will  vary.  The 
power  department  total  will  be  prorated  on  the  estimated  or 
metered  amount  of  power  taken  by  each  department.  The 
other  i;wo  non-productive  departments  will  usually  be  pro- 
rated on  a  basis  of  proportionate  division,  if,  as  is  usual  in 
Method  A,  each  department  is  a  necessary  and  invariable  link 
in  the  chain  of  production.  Such  proportionate  division  will 
be  either  on  the  basis  of  the  number  of  operators  in  each  de- 
partment, or  the  number  of  unit  processes.  In  any  case  the 
division  is  quite  arbitrary,  but  must  be  in  proportion  to  the 
total  amount  of  work  done  by  each  department  on  the  product  as 
a  whole.  Perhaps  division  on  the  basis  of  men  employed  in 
each  productive  department  is  as  fair  as  any.  In  plants  organ- 
ized for  costing  on  Method  A  such  expenses  should  bear  a  small 
proportion  to  the  rest  of  the  productive  department  costs. 

The  last  entry  on  the  journal  is  that  of  operative  wages  in  the 
productive  departments.  This  item  is  taken  from  the  pay-roll, 
and  is  added  in  to  the  productive  department  burden,  as  shown. 
Consequently  when  the  proratings  have  been  made,  and  the 
productive  department  columns  have  been  added  up,  the  cost 
of  manufacturing  capacity  in  each  department  for  one  month 
has  been  obtained.  (It  will  be  remembered  that  the  direct 
material  on  which  this  manufacturing  capacity  is  exerted  is 
charged  to  the  Production  Orders.) 

Before  showing  how  cost  of  manufacturing  capacity  is  identified 
with  particular  Production  Orders,  the  course  of  debits  and  credits 


302      MANUFACTURING  COSTS  AND  ACCOUNTS 

sel  up  through  the  Burden  Journal  must  be  traced.  The  general 
diagram  for  Method  A  (Fig.  67)  exhibits  the  relation  of  the  journal 
to  the  main  ledger  accounts  on  the  one  hand,  and  to  Departmental 
Burden  accounts  on  the  other.  The  sources  of  information 
giving  rise  to  entries  on  Burden  Journal  arc  seen  to  be,  first  the 
schedules,  secondly  the  Standing  Order  Cost  Sheets.  Theoretic- 
ally all  the  data  in  pay-roll  and  Stores  Issues  Book  should  be 
entered  on  Standing  Order  Cost  Sheets  and  not  give  rise  to 
journal  ent  ries  directly.  But  as  explained  above,  special  columns 
in  these  two  books  collect  certain  groups  of  data  that  are  identified 
with  particular  Standing  Order  numbers,  and  we  are  thus  able 
to  short-circuit  the  intermediate  step  of  the  Cost  Sheet  except 
in  the  case  of  men  who  do  varied  kinds  of  work  during  the  pay 
period,  that  is  work  on  more  than  one  Standing  Order. 

When  the  data  provided  by  schedules,  Cost  Sheets  and  special 
allocations  in  pay-roll  and  Stores  Issue  Book  have  been  entered 
on  the  journal,  and  small  items  like  works  expense  and  spoilages 
all  accounted  for  in  one  way  or  other,  and  the  non-productive 
department  totals  have  been  prorated  over  productive  depart- 
ts,  we  are  then  ready  to  make  credits  and  charges.  The 
course  of  these  will  be  shown  by  the  dotted  lines,  which  repre- 
sent credits,  and  the  double  lines  which  represent  charges.  Single 
lines  represent  data  carried  from  one  document  to  another,  not 
yet  in  ledger  accounts. 

The  following  agreements  must  exist  at  this  stage,  after 
postings  and  pro-ratings  have  been  made: 

The  aggregate  of  totals  of  the  three  productive  departments  on 
the  righl  hand  of  journal  must  agree  with  the  aggregate  of  totals 
of  all  the  credit  columns  on  the  left-hand  side. 

The  total  of  store-  column  must  agree  with  the  aggregate  of  all 
columns  in  Stores  Issues  Book  except  direct  material. 

The  total  of  depreciation  column  must  agree  with  the  total 
chargeable  for  tin-  month  against  factory  as  shown  by  the 
Depreciation  Schedule. 

The  total  of  rents,  insurance,  ^'ic,  must  agree  with  the  total 
chargeable  for  the  month  against  factory  as  shown  by  the  Rents, 
etc.  Schedule. 

The  total  of  wages  column  must  agree  with  the  aggregate  of  all 
columns  in  the  pay-roll  (grand  total  of  the  works  pay-roll). 

The  total  of  the  salaries  column  must  agree  with  the  grand  total 


COSTING  ON  METHOD  A  303 

of  the  works  salaries  pay-roll.  The  two  books  arc  shown  as  one 
in  the  example  given. 

The  total  in  works  expense  column  must  agree  with  the  total 
of  all  items  in  the  balance  of  Works  Expense  account,  less  such 
as  are  chargeable  to  Production  Orders.  This  latter  class  of  item 
will  rarely,  and  in  many  plants,  never  occur. 

The  total  spoilages  column  must  agree  with  the  amount  stand- 
ing as  a  balance  in  Spoilages  account. 

Distributing  Departmental  Burden  Over  Production  Order 
Cost  Sheets. — Having  now  obtained  a  total  in  Departmental 
Burden  accounts  representing  the  cost  of  manufacturing  capacity 
of  each  department  for  the  month,  we  have  now  to  set  up  mechan- 
ism for  obtaining  departmental  costs  of  specific  Production 
Orders. 

If  there  is  only  one  product  going  through,  then  the  depart- 
mental burden  will  be  the  departmental  cost  of  whatever  quan- 
tity of  product  has  been  made  during  the  month.  We  have, 
therefore,  only  to  find  out  what  quantity  or  weight  was  produced 
and  divide  this  into  the  cost  to  ascertain  the  cost  per  pound  or 
yard,  as  the  case  may  be,  in  each  department.  The  total  cost 
of  manufacture  will  accordingly  be  as  follows: 

Cost  of  direct  material 3  cts.  per  pound. 

Cost  of  department  4 12  cts.  per  pound. 

Cost  of  department  5 14  cts.  per  pound. 

Cost  of  department  6 8  cts.  per  pound. 

Factory  cost  of  product 37  cts.  per  pound. 

If  two  or  more  products  are  going  through,  which  do  not  differ 
in  their  rate  of  production,  that  is  to  say  one  product  does  not 
require  more  time  to  pass  through  any  process  than  any  other 
product,  then  departmental  costs  will  be  attained  by  dividing 
them  up  between  the  different  products  in  proportion  to  the 
quantity  or  weight  of  the  latter. 

But  if  this  condition  does  not  exist,  and  if  the  various  products 
passing  through  do  not  take  exactly  the  same  time  to  pass  through 
each  process,  or  if  some  processes  are  omitted  in  regard  to  certain 
products,  then  it  is  clear  that  division  of  departmental  cost 
between  products  cannot  be  made  on  a  basis  of  relative  weight 
or  quantity.  The  element  of  time  taken  must  be  introduced. 
The  same  thing  must  happen  if,  instead  of  costing  product  by  the 


304      MANUFACTURING  COSTS  AND  ACCOUNTS 

whole  production  of  each  kind  for  a  month,  we  desire  to  know  the 
cosl  of  individual  lots.  The  time  taken  by  each  such  lot  must 
obviously  be  ascertained,  unless  such  lots  are  absolutely  homo- 
geneous  and  can  be  costed  by  weight,  which  will  rarely  be  the 

Production  Orders  will  be  issued  for  each  item  of  which  we 
eto  know  the  separate  cost.  Thus  we  may  have  one  product 
going  through  which  is  quite  homogeneous,  and  can  be  costed 
by  weight,  once  we  know  what  the  whole  month's  production  of 
that  particular  product  has  cost.  Then  we  may  have  another 
kind,  not  so  homogeneous,  say  a  mixture  which  is  varied  accord- 
ing to  individual  customer's  requirements,  thus  necessitating 
individual  costing  of  direct  material,  and  which  requires  a  little 
more  grinding,  sifting,  precipitating,  etc.  than  the  standard 
kind  just  mentioned.  One  single  Production  Order  can  be  issued 
for  the  whole  month's  production  of  the  first  product,  and  indi- 
vidual Production  Orders  will  be  issue'd  for  the  separate  lots  of 
the  second  product. 

Correspondingly,  one  Cost  Sheet  will  record  all  the  month's 
(Hi  the  first  product  and  as  many  Cost  Sheets  will  be 
required  for  costing  the  second  product  as  there  are  separate  lots 
^nii<T  through. 

The  way  in  which  direct  material  is  charged  to  Production 
Order  Material  Sheets  (Fig.  70)  has  been  described.  All  the 
material  used  during  the  month  on  the  first  product  will  be 
charged  to  one  sheet.  Material  used  on  the  second  product  will 
be  charged  to  the  individual  Production  Order  Material  Sheets 
as  and  when  issued. 

It  now  remains  to  ascertain  the  time  taken  by  all  work  on 
tin-  first  product,  and  also  the  time  taken  on  individual  lots  of 
the  second  product.  Consequently  a  mechanism  for  ascertain- 
ing time  taken  by  each  Production  Order  at  each  stage  of  process 
work  will  be  necessary.  Fig.  75  shows  a  Time  Record  of  Process 
Work,  in  which  space  is  provided  for  recording  the  Production 
Order  number  and  time  of  commencement  and  completion,  and 
total  hours  worked  against  each  order  and  each  day.  Such  a 
1  may  require  considerable  supervision  to  secure  correctness, 
being  in  fact  subject  to  as  many  errors  as  workmen's  time  records, 
which  will  be  dealt  with  in  a  later  chapter. 

The  total  hours  worked  should  agree  with  the  actual  working 
hour.-  of  the  department,  and  in  the  absence  of  any  better  check 


COSTING  ON  METHOD  A 


305 


should  be  vouched  for  by  the  foreman.  Where  single  operators 
are  engaged  on  process  work,  the  addition  of  the  operative's  name 
and  clock  number  will  enable  the  Time  Record  to  be  checked 
up  with  the  Gate  Time  Record,  but  as  frequently  in  work  of  this 
kind  men  work  in  groups,  and  late  arrival  of  one  or  more  in  the 
group  does  not  necessarily  stop  the  process,  the  matter  of  check- 
ing the  record  must  be  left  to  the  decision  of  those  applying  the 
method  in  any  particular  case.  It  will  suffice  here  to  point  out 
the  necessity  for  careful  supervision,  both  as  to  hours  assigned 
to  any  order,  and  also  to  the  correctness  of  the  order  numbers 
themselves.     Because  the  element  of  wage  cost  is  absent  in  this 


Process 

I 

)epartment 

DntP 

Production  Order  No. 

Began 

Finished 

Hours 

^~^_ 

Total    Hours    Worked 

mmm 

Fig.  75. — Departmental  Process  Time  Record. 


kind  of  record  does  not  in  the  least  reduce  its  importance,  since 
cost  will  ultimately  be  based  on  the  figures  appearing  on  it. 

It  must  not  be  overlooked  that  in  arranging  the  points  at  which 
Time  Records  are  set  up,  care  must  be  taken  that  each  process 
has  an  equal  labor  value,  i.e.,  employs  the  same  number  of 
men.  If  a  department  contains  three  series  of  processes,  each 
series  consisting  of  five  machines  and  requiring  a  group  of  six 
men  to  operate  the  five  machines,  then  each  of  the  three  series 
will  require  a  separate  Time  Record.  But  should  it  happen  that 
certain  product  does  not  pass  through  the  whole  series  of  five 
machines,  then  it  will  no  longer  be  possible  to  adopt  the  group 
method  of  arrangement,  and  each  machine  must  have  a  separate 
Time  Record.  The  unit  processes  selected  must  comply  with 
two  conditions:  (1)  they  must  be  continuous,  so  that  product 

20 


Dcpt  Cost 
as  Burden  Acct. 

Productive  Hours 

S 

Cost  of 
Departmental   Hour 

> 

306      MANUFACTURING  COSTS  AND  ACCOUNTS 

of  any  kind  passing  through  one  machine  in  a  series  passes 
through  all;  alternatively  to  this,  they  must  be  separate  machines 
(2),  an  equal  number  of  operators  must  be  represented  in  each  of 
the  unit  groups.  It  follows  from  this  that  single  machines  and 
be  included  in  the  same  department,  nor  can  series 
be  of  unequal  size.     The  principle  of  the  method  depends  on  the 

averaging  of  factory  expense 
and  of  operative  wages,  con- 
sequently the  unit  selected  for 
Time  Record  must  contain 
equal  expenditure  of  wages, 
which  would  not  be  the  case 
if,  in  the  same  department, 
processes  requiring  a  series  of 

,    three  operators  were  mingled 
1  p..    i  o. — Determination,   ot    value   ot  .   .  . 

department  hour.  with  processes  requiring  single 

operators. 
There  is  also  to  be  considered  the  ease  of  a  department,  such  as 
a  floor  of  mixing  vats,  where  a  gang  of  operators  attend  on  say 
a  dozen  vats,  only  some  of  which  will,  in  general,  be  in  operation 
at  any  one  time.  Such  a  department  can  obviously  only  be 
costed  as  one  unit,  and  the  cost  of  manufacturing  capacity  will 
be  the  departmental  burden  as  collected  in  Burden  Journal. 
But  on  what  basis  can  this  be  distributed  on  products?  If  all 
varieties  of  product  take  the  same  time  in  being  mixed  and  manip- 
ulated, then  the  volume  or  weight  of  each  product  will  be  the 
of  distribution.  But  if  some  kinds  of  product  take  more 
time  than  others,  and  require  more  attention,  mere  volume  or 
weight  would  not  be  a  true  basis  of  distribution.  The  time  that 
each  product  took  in  passing  through  the  department  would  have 
to  be  recorded,  and  all  these  times  added  together  being  divided 
into  the  total  departmental  cost  would  give  the  hourly  cost  to 
be  applied  to  individual  orders.  But  even  this  would  be  incorrect 
if,  for  example,  mixtures  remained  in  the  vats  for  mere  con- 
venience  of  storage.  It  U  obvious  that  such  storage  time  has 
nothing  to  do  with  use  of  manufacturing  capacity  and  must  be 
eliminated.  The  true  basis  will,  therefore,  be  the  time  actually 
imed  in  process  work.  As  soon  as  any  mixture  is  matured 
bo  thai  ii  is  ready  for  removal  to  the  nexl  department,  the  process 
on  that  lot  must  be  considered  terminated.  In  this  way  the  work 
of  the  gang,   though   perhaps   never  at  one  time  all  working 


COSTING  ON  METHOD  A 


307 


together  on  one  vat,  is  averaged  and  diffused  over  all  the  vats  in 
work  in  strict  proportion  to  the  time  they  are  under  observation 
and  occupying  the  floor. 

Figure  76  shows  a  blank  useful  for  determining  the  value  of  the 
department  hour.  The  first  line  is  filled  out  with  department 
cost  as  indicated  by  the  balance  in  Burden  account  (as  posted 
from  the  departmental  column  in  Burden  Journal) ;  the  second 
line  is  filled  out  with  the  total  of  department  hours  worked.  This 
figure  is  the  aggregate  of  all  the  totals  of  Time  Records  during 
the  month.  It  represents  the  process-hours  worked  on  unit 
processes  whether  these  are  single  machines  or  groups  of  machines, 
or  single  operators  and  groups  of  operators.  The  third  line  in 
the  blank  is  for  the  figure  obtained  by  dividing  the  productive 
hours  into  the  departmental  cost,  thus  finding  the  cost  of  one 
departmental  hours  work. 


Fnr 

PRODUCTION    ORDER   COST  SHEET 
Otv 

N 

T. 

DEPARTMENT 

Date  or 
Period 

Process 

Cost 

Monthly  Total 

Hrs. 

Value 

Hrs. 

Value 

Departmental  Total   Cost 

Fig.  77. — Departmental  Production  Order  Cost  Sheet. 

Having  thus  provided  for  a  record  of  process-hours,  the  aggre- 
gate of  which  forms  the  total  of  productive  hours  of  the  depart- 
ment, and  having  divided  this  total  into  the  departmental  burden 
for  the  month,  and  so  obtained  the  average  cost  of  one  process- 
hour,  and  having,  moreover,  made  a  record  of  the  process-hours 
against  each  Production  Order  worked  on,  the  next  step  is  to  post 
this  latter  record  to  the  individual  Production  Order  Costs  Sheets, 
and  extend  the  money  value  of  the  hours  so  posted.  Fig.  77 
shows  a  Departmental  Production  Order  Cost  Sheet.  Space  is 
provided  for  date,  name  of  process,  and  hours  worked  as  indicated 
by  the  Time  Records.     A  column  is  also  provided  for  the  money 


308      MANUFACTURING  COSTS  AND  ACCOUNTS 

value  of  these  process-hours.  As  a  Production  Order  may  be 
in  work  over  the  end  of  a  month,  columns  are  provide  for  the 
totaling  of  each  month's  figures  separately. 

When  all  the  Time  Records  have  been  posted  to  Production 
Order  Cost  Sheets  and  extended  at  the  departmental  hourly 
rate,  then  the  aggregate  of  such  extensions  for  the  current  month 
on  all  the  Production  Order  Cost  Sheets  should  equal  the  total 
standing  in  the  Departmental  Burden  account.  To  secure  this 
agreement  and  to  provide  a  mechanism  for  crediting  the  Depart- 
mental Burden  account  and  charging  the  Departmental  Manu- 
facturing account,  a  Departmental  Manufacturing  Journal, 
(Fig.  78)  is  made  use  of. 


MANUFACTURING                                                       _ 

DFP'T 

JOURNAL 

Order  Mo. 

Hrs. 

Dept.Cost 
@  — Per  Hour 

Spoiled 
Work 

^=^^=^=^ 

Totals 

Fig.  78. — Department  Manufacturing  Journal  (Method  A). 


Each  current  Production  Order  is  listed  herein,  the  total 
process-hours  standing  against  it,  and  the  total  cost  of  production 
corresponding  are  then  placed  opposite  the  order  number,  and 
tin.'  whole  being  totalled  up,  we  arrive  at  the  total  process-hours 
for  tli<i  month,  and  also  the  total  production  cost  for  the  month 
in  thai  department.  The  total  of  hours  should  agree  with  the 
similar  total  in  Fig.  70  in  all  cases. 

The  total  departmenl  cost  as  listed  in  the  journal  is  now 
credited  to  Depart  tnenl  Burden  account  and  charged  to  Depart- 
ment Manufacturing  account  (see  general  diagram  for  Method  A, 
67).  If  all  these  operations  have  been  carried  out  at  the 
time,  namely  at  the  end  of  the  month,  the  Burden  account 
will  be  exactly  credited,  so  that  no  balance  is  left  in  it.  But  as 
will  often  happen  it  ia  desired  to  withdraw  particular  Production 


COSTING  ON  METHOD  A 


309 


Order  Cost  Sheets  (because  the  orders  are  completed)  during  the 
month,  then  the  extension  of  time  will  necessarily  be  made 
at  the  previous  month's  rate,  and  this  may  prove  to  be  either 
higher  or  lower  than  the  actual  rate  for  the  month  when  ascer- 
tained. In  such  cases  the  amounts  listed  in  the  journal,  when 
totalled,  may  prove  to  aggregate  more  or  less  than  the  total  in 
Burden  account,  thus  leaving  either  a  credit  or  debit  balance  in 
the  latter  to  go  forward  to  the  next  month.  In  general  this  will 
not  signify,  but  if  conditions  are  known  to  be  changing,  such  as  a 
general  falling  off  of  orders,  then  it  will  be  desirable  to  advance 
the  last  month's  rate  to  a  higher  figure  if  it  is  desired  to  make 
use  of  it  for  costing  and  closing  out  particular  Production  Orders 
before  the  close  of  the  month. 

Crediting  Direct  Material  to  Stores  Account  and  Charging  to 
Manufacturing  Account. — The  departmental  cost  of  production 
has  now  been  disposed  of,  as  far  as  the  present  stage  of  the 
accounting  process  is  concerned.  All  the  main  ledger  accounts 
have  received  their  proper  credits,  and  the  Whole  of  the  values 
represented  by  such  credits  have  found  their  way  on  to  Pro- 
duction Order  Cost  Sheets,  and  these  having  been  listed  in 
Manufacturing  Journal,  have 
in  turn  found  their  way  to 
Departmental  Manufactur- 
ing account.  Of  course,  the 
main  ledger  accounts  will  not 
be  completely  credited  until 
this  procedure  has  been  com- 
pleted for  all  the  productive 
departments,  and  for  direct 
material,  which  virtually 
ranks  as  a  department  in 
this  method. 

The  way  in  which  direct 
material  is  charged  to  special  Material  Cost  Sheets,  Fig.  70,  one 
such  sheet  for  each  Production  Order,  has  been  described  above. 
To  transfer  it  to  the  debit  of  Manufacturing  account  a  Material 
Journal  is  employed,  Fig.  79.  This  is  simply  a  list  of  the  cur- 
rent Production  Order  Cost  Sheets  against  each  of  which  the 
value  of  material  issued  during  the  current  month  is  entered. 
The  total  of  all  entries  is  obviously  the  value  of  material  drawn 
from  stores  on  the  one  hand,  and  chargeable  to  production  on 


MATERIAL  JOURNAL 

Production  Order  No. 

Cost 
of  M't'l. 

Total  Material 

Fig.  79. 


-Production  Order  Material 
Journal. 


310      MANUFACTURING  COSTS  AND  ACCOUNTS 


t;    >- 

Cost  c 
Ordc 

Total 
pt'l 

CO 

: 

a 

o 

o 
O 

i  III 

|  I 

-J 

Q 

u 

~P, 

JjYT 

«  s 

O 

o 

I- 

--> 

~ 


the  other.  This  total  is,  therefore, 
agreed  with  the  column  in  Stores 
[ssues  Book,  Fig.  69,  which  carries 
the  allocation  of  stores  issues  to 
direct  material,  and  is  then  credited 
to  Stores  account  and  charged  to 
Material  in  Process  account. 

The  whole  cycle  of  costing  oper- 
ations on  Method  A  has  now  been 
described,  and  the  different  steps 
can  be  followed  out  by  the  reader 
on  the  general  diagram  of  Method 

A,  Fig.  07.  All  the  credits  made 
to  the  main  accounts  on  the  left 
are  now  represented  by  amounts 
standing  to  the  debit  of  Depart- 
mental Manufacturing  accounts 
and  to  Material  in  Process  account. 
The  detail  of  these  debits  is  con- 
tained in  various  Production  Order 
Cost  Sheets  and  Production  Order 
Material  Sheets.  It  follows  that 
when  an  order  has  passed  through 
all  departments  and  has  been  com- 
pleted, the  finished  factory  cost  of 
such  an  order  is  readily  found  by 
collecting  together  the  Depart- 
mental and  the  Material  Cost 
Sheets  pertaining  to  it.  The  process 
of  crediting  Manufacturing  ac- 
counts and  Materia]  in  Process 
accounts  will,  however,  be  left  to  a 
later  chapter,  as  it  is  independent 
of  the  method  of  costing  and  is  the 
same  for  all  methods  whether  A, 

B,  or  C. 

Order  Register. — A  variety  of 
Order  Register  specially  suitable 
for  Method  A  is  shown  in  Fig.  80. 
If  Time  Records  are  posted  daily 
to   Cost   Sheets,   and   extended  at 


^ 


©-- 


Pay  Roll  Distribution  Summary  _ 


Stores  Issues  Book  Summary 


"S 

£z;l 

Sfi 

B 

5.7,' 

1 

1     1 

Material  in  Process  Acct. 


Material  Oiargfd 


Flo.  07. — General  diagram  (Method  A). 


n 


COSTING  ON  METHOD  A  311 

the  previous  month's  rate,  then,  if  the  strip-ticket  system  of  Pro- 
duction Orders,  Fig.  60,  is  employed,  departmental  cost  may  be 
figured  and  entered  as  fast  as  the  strips  are  returned  from  the 
various  departments.  In  this  way  the  Order  Register  becomes  a 
tracer,  and  the  stage  which  any  order  has  reached  may  be  seen 
by  inspection  of  the  register.  If  desired,  the  actual  costing  oper- 
ation may  be  deferred  till  the  month  end,  when  the  true  current 
departmental  hour  cost  is  known.  In  that  case  a  simple  check 
mark  may  be  placed  in  the  hours  column  of  each  department  as 
each  strip  ticket  is  returned,  thus  preserving  the  tracer  feature 
of  the  blank,  and  postponing  its  cost  record  function  till  the 
end  of  the  month. 

Spoiled  Work. — It  will  have  been  noticed  that  the  Depart- 
mental Manufacturing  Journal,  Fig.  78,  contains  a  column 
headed  "Spoiled  Work."  This  is  to  contain  the  cost  of  supple- 
mentary orders  issued  to  replace  spoiled  parts  (see  Chap.  IX, 
Part  I).  Such  orders  are  called  Replacement  Orders,  and 
work  on  them  is  chargeable,  not  to  Departmental  Manufacturing 
account,  but  to  Spoilage  account,  as  is  indicated  on  the  general 
diagram. 


CHAPTER  XVI11 

COSTING  ON  METHOD  B  (HOURLY  BURDEN  OR  PER- 
CENTAGE PLAN) 

In  costing  on  Method  A  described  in  the  last  chapter,  it  is 
assumed  that  the  rate  of  wages  is  uniform  for  all  processes 
throughout  the  departments,  and  that  overhead  expense  or 
burden  bears  uniformly  on  all  such  process  units.  This  being 
the  case,  wages  and  burden  are  thrown  into  one  sum,  and  ex- 
pressed as  process-cost  per  hour  in  one  figure. 

In  costing  on  Method  B,  now  to  be  described,  it  is  assumed 
that  unequal  amounts  of  wages  will  be  paid  for  1  hr.  work  on 
different  processes,  and  this  may  arise  from  the  wage  rates 
being  in  themselves  different,  or  from  some  system  of  paying 
by  results,  such  as  piecework,  premium,  or  bonus  being  in 
vogue,  so  that  unequal  sums  are  received  by  employees  for  1 
hr.  work  in  the  department. 

But  this  assumption  does  not  extend  to  overhead  expense  or 
burden.  It  is  still  assumed,  as  regards  burden,  that  it  bears 
equally  on  all  processes  throughout  the  department,  or  on  all 
men  in  proportion  to  their  wages.  Consequently  burden  is 
distributed  over  production  on  one  of  two  bases — either  it  is 
reduced  to  what  is  known  as  an  hourly  burden,  that  is  a  charge 
for  burden  for  each  hour  worked  in  the  department  on  pro- 
ductive work,  or  it  is  reduced  to  a  ratio  or  percentage  of  pro- 
ductive wages.  That  is  to  say  that  if  the  burden  for  a  given 
department  is  $400  and  4,000  hr.  have  been  worked  on  pro- 
ductive work,  the  hourly  burden  is  reckoned  at  10  cts.  an  hour, 
or  alternatively,  if  the  productive  wages  in  the  department  were 
$800,  then  the  burden  percentage  is  said  to  be  50  per  cent. 

This  method  of  costing  is  very  widely  used  at  the  present 
time.  In  many  cases  it  is  quite  correct,  in  some  cases  approxi- 
mately correct,  in  others  wholly  incorrect. 

It  is  correct  in  as  far  as  the  assumption  made  as  to  the  uniform 
bearing  of  overhead  expense  on  all  processes  is  true.  In  propor- 
tion a£  the  assumptioD  tends  to  be  divorced  from  the  facts  of  pro- 

312 


COSTING  ON  METHOD  B  313 

duction  it  becomes  incorrect.  It  is  necessary,  therefore,  to 
consider  what  this  assumption  implies.1 

In  a  former  chapter  it  was  shown  that  burden  is  first  of  all 
departmentalized  before  it  is  applied  to  costs.  It  was  shown  that 
considerable  pains  are  necessary  before  the  amount  of  burden 
applicable  to  each  department  is  determined.  We  do  not 
ascertain  the  total  of  burden  and  then  distribute  it  equally 
between  departments.  On  the  contrary,  attention  is  paid  to  the 
amount  of  equipment  each  department  contains,  and  the  cost  of 
the  building  it  occupies,  and  on  these  values  such  charges  as 
depreciation,  rents,  insurance,  taxes,  etc.  (also  interest  where 
this  is  included  in  cost)  are  apportioned.  Similarly  we  collect 
the  internal  expense  of  each  department,  such  as  its  own  repair- 
ing, cleaning  and  laboring  costs,  separately.  And  in  prorating 
expense  departments  over  productive  departments  some  basis 
is  taken  that  implies  measuring  the  cost  of  service  as  each  depart- 
ment has  received  it.  Thus  the  power-plant  cost  is  distributed 
over  productive  departments  in  proportion  to  the  power,  light 
and  heat  they  have  used. 

Now  departmentalizing  is  merely  localizing  expense  to  certain 
groups  of  production  centers.  Departments  are  usually  planned 
so  that  they  represent  some  distinct  division  of  the  productive 
scheme  which  is  so  different  from  other  divisions  that  it  merits 
being  costed  separately.  Thus  if  we  are  making  soap,  the  kettle- 
floor  costs  are  separated  from  the  packing,  mixing,  boxing  and 
other  departments.  In  engineering  plants  the  foundry,  the 
machine  shop,  the  grinding  shop  and  the  fitting  floor  will  be  made 
into  separate  departments.  All  these  departments,  when  mapped 
out,  will  be  charged  with  overhead  expense  service  in  proportion 
as  they  have  made  use  of  it. 

This  is  equivalent  to  saying  that  one  group  of  production 
centers  (a  production  center  being  any  place  by  and  at  which 
work  is  done,  such  as  a  machine,  a  vat,  a  bench,  etc.)  does  not 
absorb  the  same  amount  of  the  different  kinds  of  service  which 
we  collect  through  Standing  Orders  as  other  groups.  Each  such 
group,  called  a  department,  absorbs  its  own  proper  share. 

Now  this  principle  can  be  carried  a  step  further.     If  in  a  given 

1  Readers  desiring  to  follow  up  the  question  of  burden  distribution  in 
greater  detail  than  is  possible  in  a  general  work  are  referred  to  the  author's 
special  studies:  "The  Proper  Distribution  of  the  Expense  Burden"  (2nd 
edition,  1913)  and  "Production  Factors"  (1910). 


314      MANUFACTURING  COSTS  AND  ACCOUNTS 

department,  we  have  20  production  centers,  we  may  very  well 
ask  whether  the  burden  assessed  against  the  department  is, 
as  a  matter  of  fact,  properly  distributable  equally  between 
them.  Should  each  one  of  them  bear  one-twentieth  of  the  total? 
And  when  we  remember  that  burden  is  really  made  up  of  a 
number  of  wholly  different  kinds  of  charges,  it  may  seem  likely 
that  some  of  our  production  centers  may  enjoy  certain  kinds 
of  service,  say  for  example,  the  power  service,  to  a  greater  extent 
than  other  centers.  If,  in  short,  some  of  them  are  large  and  costly 
machines,  using  considerable  power,  covering  considerable  floor 
space,  using  the  services  of  expensive  cranes,  and  so  forth,  while 
others  are  small,  cheap,  light  machines,  then  it  will  be  obvious  that 
the  distribution  of  burden  within  the  department  should  be  based 
on  some  principle  that  will  allocate  it  to  the  production  centers 
in  proportion  to  the  use  each  makes  of  the  different  kinds  of 
service. 

If,  therefore,  there  is  a  considerable  difference  between 
machines,  in  cost,  size,  power  consumption,  use  of  transport 
machinery  and  service,  then  the  hourly  burden  or  percentage  plan 
(Method  B)  is  not  correct.  To  employ  it  under  these  circum- 
stances is  pretty  nearly  as  bad  as  it  would  be  to  divide  the  total 
of  all  burden  between  departments  in  proportion  to  their  num- 
ber and  not  in  proportion  to  their  use  of  the  various  services  of 
which  burden  represents  the  aggregate  cost. 

This  rule,  however,  must  be  applied  with  caution.  If  a 
department  consists  of  a  series  of  machines  through  which  all 
product  necessarily  passes,  then  if  some  of  the  machines  in  the 
chain  are  larger,  etc.,  than  the  others,  it  will  not  prevent  the  use 
of  Methods  A  or  B,  because  the  whole  chain  of  machines  is  con- 
sidered as  one  machine.  And  if  there  were  three  or  four  such 
chains  of  machines  in  a  department,  they  would  be  virtually 
similar  production  centers.  But,  on  the  other  hand,  the  moment 
the  machines  or  set  of  machines  used  in  one  process  in  a  depart- 
ment call  for  service  in  different  proportion  to  other  machines 
or  sets  of  machines,  then  neither  Method  A  nor  Method  B  can 
be  considered  as  satisfactory  methods  of  costing. 

On  the  other  hand,  if  a  department  contains,  say,  50  milling 
machines  of  practically  the  same  size  and  make,  then  if  all  the 
work  is  daywork  and  all  operators  are  paid  at  the  same  rate, 
Method  A  can  be  satisfactorily  applied.  If  the  same  machines 
are  manned  by  operators  working  on  a  piecework  or  premium 


COSTING  ON  METHOD  B  315 

system,  then  Method  B  will  be  satisf actor y.  But  if  a  number  of 
machines  of  different  sizes  and  kinds  are  in  use,  t  lion  Mot  hod  ( '  is 
the  only  accurate  method  of  costing. 

Method  B  is  also  satisfactory  for  all  hand  industries  or  depart- 
ments in  which  hand  industries  are  carried  on.  By  hand  in- 
dustries is  meant  those  in  which  the  machinery  and  equipment 
employed  by  the  workers  is  negligible.  Cutting  rooms,  sheet- 
metal  shops,  and  the  molding  floors  of  most  foundries  may  be 
cited  as  examples.  Other  cases  may  be  mentioned  in  which, 
though  machinery  is  employed,  it  is  very  incidental  to  the  hand 
skill,  even  though  in  some  cases  costly  and  consuming  service. 
Thus  in  a  blacksmith  shop,  drop  stamps  and  steam  hammers, 
hack  saws,  forges,  etc.,  may  be  in  use,  but  only  intermittently. 
They  are  rather  aids  or  auxiliaries  than  actual  production  centers. 
But,  on  the  other  hand,  if  such  a  shop  were  organized  for  con- 
tinuous manufacture  of  some  kind,  so  that  certain  machines  were 
kept  steadily  at  work  on  production,  that  would  alter  the  case. 
Another  case  where  Method  B  is  sufficiently  accurate  is  the  repair 
shop  of  a  mill  or  other  plant  of  a  non-engineering  character.  The 
machinery  in  such  a  shop  is  usually  of  a  miscellaneous  character, 
and  whether  one  machine  or  other  is  used  on  a  particular  job 
depends  on  convenience.  It  is  true  that  even  in  this  case  a 
repair  job  requiring  the  services  of  a  large  planer  should  be  visited 
more  heavily  with  burden  than  one  requiring  only  benchwork 
or  the  services  of  a  light  drill,  but  as  repair  machinery  is  rarely 
kept  in  constant  use,  that  is  to  say  a  considerable  percentage 
of  machines  is  often  idle,  the  ultimate  result  under  either  Method 
(B  or  C)  would  be  much  the  same,  and  therefore  B,  being  the 
simpler,  would  have  the  preference. 

To  sum  up  the  foregoing  arguments — Method  B  is  indicated 
where  the  assumptions  on  which  it  is  based  are  true,  namely 
when  the  distribution  of  expense  within  departments  is  obviously 
equal  as  between  one  production  center  and  another.  If,  on  the 
other  hand,  a  department  contains  a  variety  of  machinery,  some 
taking  more  service  in  the  way  of  power,  space,  transport  facilities, 
supervision,  etc.,  than  others,  then  Method  C  should  be  used. 

In  some  cases  a  department  that  calls  for  Method  C  on  account 
of  variety  of  machines,  can  be  resolved  into  two  or  more  depart- 
ments, each  sufficiently  uniform  in  their  equipment  to  justify 
the  employment  of  Method  B.  Departmentalization  is  the  key 
to  accuracy  in  costing,  and  the  peculiar  merit  of  Method  C  is  that 


316     MANUFACTURING  COSTS  AND  ACCOUNTS 

it  carries  the  principle  of  departmentalization  as  far  as  the  produc- 
tion centers  themselves,  that  is  to  say,  to  the  ultimate  limit  pos- 
sible. It  is  this  that  makes  it  the  most  accurate  of  all  systems. 
But  as  said  above  in  other  words,  this  ultimate  simplicity  is 
already  reached  for  practical  purposes  when  a  department  con- 
tains only  machines  of  practically  the  same  cost,  size,  and  call 
on  service.  When  that  is  the  case,  further  departmentalization 
is  unnecessary — Method  A  will  give  accurate  results  if  wages  are 
uniform  throughout  the  shop,  and  Method  B  will  take  its  place 
if  wages  or  earnings  per  hour  are  not  uniform. 

Having  now  explained  the  circumstances  under  which  Method 
B  is  applicable,  the  practical  working  of  the  method  can  be 
described. 

The  General  Diagram. — The  large  folding  diagram  at  the 
end  of  this  book  represents  a  general  scheme  of  cost  accounts 
on  Method  B.  The  left-hand  portion  of  the  diagram  deals  with 
the  distribution  of  purchases  to  the  main  ledger  accounts  (in- 
dicated by  circles)  and  has  been  fully  covered  in  previous  chap- 
ters. The  symbols  above  the  large  square  represent  the  order 
system,  while  those  on  the  extreme  right  of  the  diagram  deal 
with  the  clearing  of  departmental  accounts  and  the  ultimate 
charging  to  Finished  Production  Orders  account. 

The  portion  of  the  diagram  within  the  large  square  represents 
the  cost  system  proper.  The  various  sources  of  information 
as  to  the  elements  of  cost  are:  the  schedules  for  depreciation, 
rents,  insurance,  taxes,  etc.;  interest  (which,  however,  being 
optional  in  all  costing  methods  will  be  dealt  with  separately  in  a 
later  chapter);  and  the  summaries  of  pay-roll,  Salaries  Book,  and 
Stores  Issues  Book. 

The  method  by  which  allocation  of  wages  to  Orders  is  effected 
(namely,  by  Time  Sheets  and  piecework  earnings  notes)  and  of 
stores  issues  to  Orders  (by  means  of  Stores  Issue  Sheets)  is 
displayed;  and  the  Order  Cost  Sheets  to  which  the  items  from 
the  foregoing  are  posted  are  shown  immediately  underneath. 
Below  these  documents  are  shown  the  Burden  Journal  on  the 
I*  H  hand,  and  the  Manufacturing  Journal  on  the  right  hand. 
The  Burden  Journal  receives  the  data  collected  by  the  Standing 
( >rder  ( losl  Sleet-,  and  .-nine  from  the  Depreciation,  etc.,  Sched- 
ule, and  when  all  entries  have  been  completed,  becomes  the 
Bource  from  which  arc  made,  first,  credits  to  the  main  ledger 
accounts;    secondly,    distribution    of   the   service   cost   of   non- 


COSTING  ON  METHOD  B  317 

productive  departments  to  productive  departments;  and  thirdly, 
charges  of  the  total  of  burden  thus  ascertained  against  pro- 
ductive departments  to  a  Departmental  Burden  account,  one 
for  each  department. 

The  Manufacturing  Journal,  one  of  which  is  used  for  each 
productive  department,  lists  the  various  Production  Orders 
(and  in  some  plants  Plant  Addition  Orders,  which  are  merely 
a  special  kind  of  Production  Order),  and  then  becomes  the 
medium,  first,  for  distributing  burden  over  Production  Orders, 
either  on  the  hourly  burden  or  the  percentage  method;  secondly, 
for  crediting  the  department  Burden  account  with  the  total 
so  distributed;  thirdly,  for  charging  Departmental  Manu- 
facturing account  with  the  total  of  direct  wages,  direct  material 
and  burden  as  listed  in  the  journal. 

The  Order  System. — While  the  Standing  Order  scheme 
indicated  for  Method  A  can  be  applied  in  Method  B  the  larger 
scale  of  operations  of  plants  suitable  for  organizing  on  Method 
B  makes  it  desirable  that  a  more  elaborate  Standing  Order 
system,  based  on  separating  the  costs  of  service  into  several 
principal  groups,  called  production  factors,  should  be  employed. 
Moreover,  should  it  be  desired  at  any  time  to  put  the  costing  of 
any  department  on  Method  C  this  arrangement  of  Standing 
Orders,  besides  giving  greater  precision  in  the  control  of  over- 
head expense,  will  render  the  introduction  of  Method  C  much 
easier.  Fig.  56  in  Chap.  XII  (Part  II)  shows  a  Standing  Order 
table,  grouped  by  production  factors,  and  arranged  for  four 
non-productive  and  four  productive  departments. 

It  will  be  noticed  that  the  main  difference  between  this  table 
and  that  suggested  for  Method  A  lies  in  the  greater  subdivision 
of  items,  and  their  assembly  or  grouping  in  divisions  corre- 
sponding to  definite  classes  of  expenditure.  Thus  the  whole 
field  is  divided  up  into:  (1)  expenses  connected  with  buildings 
and  premises;  (2)  those  connected  with  storage  of  material 
and  its  handling  and  transporting  from  place  to  place,  both 
between  departments  and  between  machines  or  production 
centers;  (3)  those  connected  with  superintendence,  including 
the  share  of  administrative  salaries  to  be  borne  by  the  factory; 

(4)  those  connected  with  the  factory  organization,  including 
share  of  the  general  office  expense  (depreciation,  insurance, 
stationery,  books,  phones  and  postages  borne  by  the  factory); 

(5)  those  connected  with  the  generation  of  power  and  its  trans- 


318      MANUFACTURING  COSTS  AXD  ACCOUNTS 

mission  to  machines;  (6)  those  connected  with  the  productive 
machinery  itself,  chiefly  depreciation,  insurance,  and  repair  and 
maintenance.  All  factory  expense  can  be  legitimately  placed 
in  one  or  other  of  these  groups,  and  each  such  group  represents  a 
particular  kind  of  service  rendered  to  production  and  called 
upon  to  a  different  degree  by  each  department. 

In  Method  B  no  special  use  is  made  of  this  grouping  except 
in  the  way  of  reports  and  returns  in  which  the  different  factors 
are  given  separate  existence.  This  will,  however,  not  be  con- 
sidered until  the  chapter  on  "Reports  and  Returns."  But  as 
the  data  must  be  arranged  in  some  form,  and  it  makes  no  par- 
t  icular  difference  to  this  method,  in  what  form  they  are  arranged 
so  long  as  the  allocation  to  departments  is  sufficiently  detailed 
and  clear,  it  is  just  as  well  to  adopt  the  production  factor  classi- 
fication. Once  arranged  it  implies  no  more  work  to  collect  the 
data  than  if  they  were  grouped  in  any  other  order.  The  table 
given  in  Fig.  56  is,  of  course,  only  a  suggestion.  In  many 
plants  modifications  would  be  required,  and  in  some  it  would 
require  amplifying,  as  for  instance  in  an  engineering  works,  where 
tool  rooms,  compressed-air  systems  and  other  non-productive 
depart  ments  exist.     This  was  dealt  with  in  Chap.  XII  (Part  II). 

In  a  large  number  of  the  plants  employing  Method  B  both 
Production  Orders  and  Component  Orders  will  be  necessary. 
As  explained  in  Chap.  XIII  (Part  II)  Component  Orders  are 
sul 'divisions  of  Production  Orders.  When  they  are  in  use,  the 
Production  Order  number  becomes  merely  a  device  for  collecting 
all  the  component  costs  belonging  to  a  particular  Production 
Order;  but  it  does  not  follow  that  such  subdivision  is  necessary 
in  the  case  of  every  order.  A  given  Production  Order,  for 
example,  might  have  only  one  Component  Order  to  which  all 
work  on  the  Production  Order  was  charged.  From  this  ele- 
mentary stage,  to  a  series  of  Component  Orders  giving  the 
very  .  amount  of  detail,  is  obviously  a  matter  of  arrange- 

ment of  the  Component  Orders  at  the  commencement.  In 
this  way,  some  costs  may  be  obtained  in  great  detail,  while 
others  are  obtained  in  less  detail.  When  Component  Orders 
are  m  use  at  all  it  is  best  to  give  all  work  a  Component  Order, 
even  though  only  one  such  order  is  required  on  a  given  Pro- 
duction Order.  The  way  in  which  Production  Orders  and 
Component  Orders  are  registered  and  issued  was  discussed  in 
Chap.  XIII  (Part  II). 


COSTING  ON  METHOD  B 


319 


Cost  Sheets.^Figure  81  shows  a  Standing  Order  Cost  Sheet 
arranged  for  collecting  items  of  wages,  material  and  sundries 
chargeable  against  Standing  Order  numbers.  Fig.  82  represents 
a  Cost  Sheet  which  may  be  used  for  colle'cting  items  that  do  not 
arise  within  the  factory,  but  are  obtained  from  the  Schedules  of 


For 

STANDING 

ORDER    COST 
Dent. 

SHEET 

Mn 

Date 

Item 

Hrs. 

Wages 

Mafl. 

Wks. 
Exp. 

Total 

Fig.  81.— Standing  Order  Cost  Sheet. 

Depreciation,  etc.  The  use  of  these  latter  sheets  is  optional. 
Entries  from  the  schedules  may  be  made  direct  to  the  Burden 
Journal  if  preferred,  but  in  case  it  is  required  to  obtain  a  record 
on  Cost  Sheets  uniform  with  the  other  Standing  Order  costs,  this 


For 

STANDII 

>TG    ORDER    COST    SHEET 
f)ppt                                          No. 

Month 

Deprcc. 

Ins'ce 

Rents 

Taxes 

Total 

Fig.  82. — Standing  Order  Cost  Sheet  for  items  taken  from  Schedules. 

intermediate  stage  of  Cost  Sheets  for  such  items  may  be  used. 
Each  of  these  Cost  Sheets  lasts  one  month.  As  soon  as  the  last 
item  for  the  current  month  has  been  entered  on  a  sheet,  a  new 
sheet  for  that  Standing  Order  is  made  out  to  take  care  of  the 
new  month's  items. 


320     MANUFACTURING  COSTS  AND  ACCOUNTS 

Figure  83  shows  a  Cost  Sheet  for  Component  Orders.  As  will 
be  seen,  it  is  arranged  for  recording  both  labor  and  material. 
In  most  plants  using  this  method,  it  is  customary,  on  account  of 
the  number  of  parts  in  the  product,  to  make  the  record  of 
material  alongside  that  of  labor,  but  of  course  there  is  no  absolute 
necessit  y  for  this.  Separate  Material  Cost  Sheets  could  be  issued 
as  in  the  case  of  Method  A.  In  this  case  the  Component  Order 
would  be  the  same  as  that  shown,  except  that  the  columns  relat- 
ing to  material  would  be  absent.  When  such  separate  Material 
Cost  Sheets  are  used  the  procedure  with  regard  to  them  is  the  same 
as  already  outlined  for  Method  A.  A  separate  Material  Journal 
is  used — material  in  this  case  being  regarded  as  a  department. 

Whether  this  plan  can  be  adopted,  and  it  possesses  advantages 
in  the  direction  of  simplicity  when  it  can,  will  depend  on  the 
nature  of  the  work.  In  highly  standardized  work,  such  as  repe- 
tition machine  building,  where  the  exact  quantity  and  nature  of 
material  can  be  foreseen  and  tabulated,  separate  Material  Cost 
Sheets  in  connection  with  a  "master  schedule"  of  Production 
Orders,  as  will  be  described  in  the  chapter  on  clearing  Manufac- 
turing account,  afford  close  control  of  material.  But  in  non- 
repetition  work,  it  is  safer  to  use  the  plan  of  charging  all  material 
to  the  Component  Order  on  which  it  is  first  issued. 

Referring  to  Fig.  83,  it  will  be  noticed  that  the  hours,  labor,  and 
material  sections  are  provided  with  columns  headed  "Monthly 
Total."  These  are  for  the  purpose  of  bringing  out  the  total  of 
individual  months  separately,  in  case  the  Component  Order  is 
being  worked  on,  or  remains  in  the  department,  over  the  end  of  a 
month.  The  total  of  the  first  month's  transactions  are  brought 
out  in  the  "monthly"  column  for  entry  on  the  journal.  Next 
month,  only  the  items  charged  in  that  month  will  be  so  brought 
out.  The  addition  of  the  various  monthly  totals  will  of  course 
represent  the  cost  of  the  item  to  date.  The  column  headed 
"burden,"  on  the  other  hand,  has  no  separate  column  for  a 
monthly  lota],  since  it  is  in  itself  a  monthly  figure,  calculated 
cither  <>n  the  monthly  total  of  hours  or  of  wages.  It,  therefore, 
appears  only  once  in  any  month.  Works  expense  is  also  posted 
in  one  sum  monthly  (if  any  such  item  happens  to  occur,  as 
when  a  man  lias  been  sent  outside  the  plant  for  some  purpose 
connected  with  the  order)  so  that  no  separate  column  is  required 
for  ascertaining  its  total  in  any  month. 

Works  expense,  however,  might  be  incurred,  as  in  the  case  just 


COSTING  ON  METHOD  B 


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322      MANUFACTURING  COSTS  AND  ACCOUNTS 

mentioned,  in  a  way  that  prevented  its  association  with  any 
particular  component.  In  this  case  a  special  Component  Order 
should  be  issued,  headed  "Outside  Expense"  or  similar  title, 
and  all  such  expense  charged  to  it,  so  that  it  will  eventually  come 
through  as  part  of  the  cost  of  the  Production  Order,  though  not 
chargeable  against  any  actual  physical  component. 

In  a  plant  where  Component  Orders  were  not  necessary  either 
because  detail  cost  was  not  desired,  or  because  the  work  contains 
no  parts  or  subdivisions  to  which  Component  Orders  could  be 
applied,  the  same  blank  would  be  applicable,  except  that,  of 
course,  the  words  "Component  Order  Number"  would  be  omitted. 

The  calculation  of  the  burden  amount  is  made  after  the 
departmental  accounts  are  closed  for  the  month.  But  it  may 
often  happen  that  it  is  required  to  close  out  the  cost  of  an  order 
immediately  it  is  completed.  In  this  case,  the  burden  figure  used 
in  the  previous  month  will  be  used  as  a  basis  of  calculation, 
whether  on  hours  or  wages,  and  the  resulting  calculation  will  be 
entered  in  the  monthly  burden  column.  At  the  month  end,  this 
figure  will  be  entered  in  the  Burden  Journal  along  with  the  other 
charges  to  the  order,  and  must  be  considered  as  already  dis- 
tributed when  the  burden  distribution  is  undertaken.  If  the 
percentage  or  hourly  burden  proves  to  be  higher  or  lower  than 
that  used,  the  matter  cannot  be  remedied  if  the  costs  of  the  order 
have  already  been  dealt  with  and  made  use  of  at  further  stages 
of  the  accounting.  In  general,  this  will  not  matter  as  the  dif- 
ference between  one  month's  burden  percentage  and  another  will 
not  be  great.  But  if  the  cost  was  only  wanted  provisionally,  that 
is  for  estimating  or  other  purpose  of  an  informal  character,  then 
the  calculation  may  be  made  in  pencil  on  the  Cost  Sheet,  and  ig- 
nored when  burden  distribution  is  being  made  at  end  of  the  month. 

The  cost  of  a  Production  Order  will  be  the  sum  total  of  the 
separate  costs  of  its  components.  But  as  departments  arc  con- 
cerned only  with  components,  the  collection  of  ( 'omponent  ( >rder 
and  their  transfer  to  a  Production  Order  Cost  Sheet,  or 
Mash  Schedule,  is  not   made  until  after  the  last  depart- 

mental job  has  been  completed.  In  machine  works  this  will 
'b«-  the  assembling  or  "lit, ting"  departments  operation.  The 
complete  machine  being  assembled  on  a  "Fitting  Order"  which 
ranks  preciselj  as  a  Component  Order,  notwithstanding  that  the 
work  represented  on  it  is  not  identified  with  any  single  component, 
when  tie  tin-  final  work  is  completed,  the  whole  set  of 


COSTING  ON  METHOD  B  323 

Component  Orders  relating  to  the  Production  Order  are  tabu- 
lated, and  the  aggregate  cost  of  all  of  them  is,  of  course,  also  the 
cost  of  the  Production  Order. 

Distribution  of  Material. — The  original  documents  represent- 
ing material  drawn  out  of  stores  will  be  Stores  Requisition  Notes 
or  Bills  of  Material  as  described  in  Chap.  V.  (Part  II).  Where 
Bills  of  Material  are  in  use  it  will  be  preferable  as  a  rule  to  treat 
material  as  a  department,  that  is  to  make  out  a  Material  Cost. 
Sheet  for  each  Production  Order,  instead  of  charging  to  indi- 
vidual Component  Orders.  This  method  was  described  in  con- 
nection with  Method  A.  In  all  other  cases,  and  in  any  case  as 
regards  Standing  Orders,  separate  entries  will  be  made  on  a 
Stores  Issues  Book  similar  to  Fig.  39.  Daily  allocations  to  the 
different  classes  of  orders  and  to  departments  will  be  also  made 
in  a  summary  book  similar  to  Fig.  39a.  By  this  procedure, 
separate  totals  are  obtained  for  the  three  classes  of  orders  in  each 
department.  The  items  may  then  be  entered  on  the  different 
Cost  Sheets  which  will  be  arranged  in  groups  corresponding  to 
the  above-mentioned  allocations.  When  any  given  group  has 
been  entered  up,  the  entries  just  made  should  be  aggregated  on 
an  adding  machine  and  agreed  with  the  total  for  that  class  of 
orders  and  department  as  shown  by  the  Stores  Issues  Summary. 
By  this  means  correct  posting,  as  regards  the  amounts  at  any  rate, 
is  assured  as  we  go  on.  It  is  much  better  to  spend  a  little  time 
at  this  stage  to  ensure  correctness  than  to  have  errors  to  trace  at 
a  later  stage. 

At  the  month  end,  the  Stores  Issues  Summary  Book  will 
be  totaled  up,  and  the  amount  chargeable  against  each  de- 
partment for  material  issued  to  each  class  of  order  will  be  found. 
This  figure  must  agree  with  the  totals  of  Cost  Sheets  as  they  are 
listed  in  the  Burden  and  Manufacturing  Journals,  as  will  be 
shown  presently.  It  need  hardly  be  pointed  out  that  when  the 
entering  up  of  Stores  Issues  on  Cost  Sheets  is  completed,  the 
Cost  Sheets  will  now  contain,  in  one  place  or  another,  items 
aggregating  in  value  to  the  whole  of  the  Stores  Issues  for  the 
month.  In  other  words,  all  material  taken  out  of  stores  has 
now  been  charged  to  some  or  other  Cost  Sheet,  and  therefore 
to  some  or  other  order,  whether  Standing,  Production  or  Plant 
Addition. 

Distribution  of  Wages. — In  general,  the  daily  system  of  record- 
ing time  and  wages  described  in  Chap.  IX  (Part  II)  will  be  used 


324      MANUFACTURING  COSTS  AND  ACCOUNTS 

in  connection  with  Method  B.  The  daily  pay-roll,  Fig.  52, 
will  be  used  in  connection  with  some  Time  Sheet  mechanism  for 
ascertaining  how  each  man  has  divided  his  time  between  various 
orders. 

Not  all  men,  however,  will  require  Time  Sheets.  Only 
those  men  who  work  on  different  orders,  sometimes  on  one  and 
sometimes  on  another,  will  require  them.  Many  men  will  be 
engaged  on  permanent  jobs  which  are  chargeable  against  a 
single  Standing  Order  during  the  whole  month.  Such  men's 
wages  can  be  charged  not  oftener  than  once  a  week  to  Cost 
Shifts,  if  a  special  place  on  the  pay-roll  is  devoted  to  them. 

In  all  other  cases  Time  Sheets  or  some  equivalent  mechanism 
must  be  employed,  in  order  to  ascertain  how  the  total  earnings 
of  the  man,  as  indicated  by  gate  time,  has  been  expended  on 
orders.  It  is  not  intended  here  to  describe  the  innumerable 
devices  that  have  been  designed  for  this  purpose.  Though 
excellent  for  the  purpose,  and  frequently  great  labor  savers  in 
the  computation  of  "elapsed  time,"  that  is,  the  time  that  has 
elapsed  between  the  hour  of  starting  the  job  and  that  of  finish- 
ing it,  they  introduce  no  new  principle  in  accounting,  although 
in  some  cases  they  provide  a  higher  degree  of  precision  and 
accuracy  than  is  commonly  found  without  their  use.  But  as 
the  principles  involved  can  be  more  clearly  shown  by  con- 
sidering the  use  of  an  ordinary  Time  Sheet,  that  form  of  record 
will  be  selected  for  description.  It  may  be  added  in  regard  to 
any  other  method,  that  it  should  provide  the  same  information 
and  yield  precisely  the  same  results  as  that  now  to  be  described. 
The  method  may  be  different  and  even  superior,  more  prac- 
tically accurate  or  easier,  but  the  aim  is  the  same.  Moreover, 
a  Time  Sheet  method  can  be  made  absolutely  accurate  by  a 
hull'  care,  while  on  the  other  hand,  the  more  automatic  methods, 
if  negligently  applied,  may  easily  give  inaccurate  results.  It 
may  be  admitted,  however,  that  the  use  of  clock  methods  and 
time  stamps,  particularly  where  these  automatically  calculate 
"elapsed  time,"  are  a  considerable  help  if  proper  arrangements 
are  made  in  joining  them  up  to  the  system. 

Figure  M  represents  a  type  of  Time  Sheet  that  will  illustrate 
the  requirements  of  any  method  adopted  to  secure  a  record 
of  the  distribution  of  men's  time  to  orders.  The  following  in- 
formation is  provided  for: 

At  the  top  a  stub  summarizes  the  days  time  and  wages.% 


COSTING  ON  METHOD  B 


325 


01 
V 

03 

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■ 

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Wages 

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326      MAN  I  /'.  1 CTURING  COSTS  AND  ACCOUNTS 

The  sections  below  are  separated  from  the  stub  and  from 
each  other  by  very  thick  lines,  so  that  at  the  proper  moment 
they  may  be  cut  up  by  a  cutting  machine  in  the  same  way  as 
described  for  the  Stores  Issue  Sheets,  Fig.  39, in  Chap.  V  (Part  II). 

Each  of  these  sections  records  the  time  spent  on  one  job, 
which  may  be  work  on  a  Standing  Order  or  otherwise.  Spaces 
are  provided  to  record: 

*  Order  number. 

*  Component  number. 

*  Man's  number. 

*  Machine  number. 

*  Nature  of  work. 

*  Time  job  commenced. 

*  Time  job  finished. 
Hours  taken. 
Wages  earned. 

*  Number  of  pieces  good. 

*  Number  of  pieces  bad. 

If  instead  of  being  on  daywork  the  man  is  employed  on  piece- 
work, a  space  is  provided  for  the  piecework  price. 

At  the  end  of  the  day  the  Time  Sheet,  filled  out  as  to  all  the 
items  marked  (*)  above,  is  taken  from  the  man,  and  next  morn- 
ing is  put  in  hand  for  extension,  verification  and  completion. 
The  routine  of  these  operations  has  been  fully  described  in 
Chap.  IX  (Part  II).  It  should,  however,  be  explained  that  the 
sections  above  shown  (Fig.  85)  which  are  afterward  cut  up  for 
sorting  into  order  numbers,  are  equivalent  to  separate  Time 
Cards  as  used  in  most  mechanical  systems  of  time-cost  keeping. 
Such  cards  necessarily  contain  the  same  amount  of  information 
;i-  the  sections,  but  as  a  rule,  nothing  equivalent  to  the  stub  for 
totaling  the  day's  earnings  is  used. 

When  all  these  operations  have  been  performed,  the  sections 
are  cut  up  and  sorted  to  their  order  numbers,  Standing  Order 
•  a-  Production  Order  as  the  case  may  be.  The  latter  are  then 
sorted  into  their  Component  Orders,  corresponding  to  individual 
Component  Cost  Sheet-.  Hours  and  wages,  together  with  other 
data  as  called  for  by  the  rulings,  are  then  entered  on  the  Cost 
Sheets,  until  every  section  has  been  disposed  of. 

Tli.  sectional  Time  Sheet,  described  is  suitable  for  those 
workers  who  keep  their  own  Time  Sheets.  Repair  men  and 
others  whose  movements  are  not   very  closely  supervised   may 


COSTING  ON  METHOD  B 


327 


use  such  sheets  satisfactorily,  and  the  record  will  be  probably  as 
accurate  in  this  form  as  in  any  other.  But  as  regards  pro- 
ductive workmen,  it  is  generally  recognized  thai  Time  Sheets 
or  Cards  should  be  kept  for  them  and  not  by  them.  In  some 
plants  this  is  effected  by  providing  each  sub-foreman  or  "gang 
boss"  with  a  telephonic  communication  to  a  cost  clerk  who 
keeps  all  the  Time  Sheets  or  cards  and  makes  the  entries  on 
them  according  to  the  data  telephoned  to  him.  Where  such  a 
system  is  in  use,  the  section  Time  Sheets  have  advantages  over 
separate  cards  in  that  each  man's  record  is  consecutive  and  can 
be  picked  out  without  hesitation.  The  day's  items,  also,  are 
together  until  verification,  extension  and  entry  on  pay-roll  is 
completed. 


Man 

PIECEWORK  STATEMENT 

R. 

Clnrlc  Nn, 

n<Tt .                       W. 

Prod. 

Order 

No 

■ 

Com  p. 

Order 

No 

No. 

of 

Piece 

Price 
Each 

Total 

Piece 

Earning 

Day  Time 

Balance 
Due 

Hrs. 

Wages 

-^-—-^-^ 

====: 

Totals 

Fig.  85. — Weekly  statement  of  pieceworker's  earnings. 

Where  any  of  the  various  systems  for  paying  men  by  results, 
that  is  by  piecework,  premium  or  bonus,  are  in  use,  some  addi- 
tional mechanism  must  be  provided  for  getting  the  balances  due 
to  the  men  over  and  above  their  ordinary  day  wages  into  the 
pay-roll  on  the  one  hand  and  into  the  Cost  Sheets  on  the  other. 
The  general  precautions  to  be  observed  in  dealing  with  premium, 
etc.,  balances  were  discussed  in  Chap.  IX  (Part  II).  The  first 
necessity  in  any  such  system,  as  far  as  the  accounting  is  con- 
cerned, is  the  provision  of  an  authority  for  the  payment  of  the 
extra  earnings.  Fig.  64  gives  a  suggestion  for  a  form  of  Premium 
Order  useful  in  connection  with  the  sectional  Time  Sheets  above 
described,  inasmuch  as  the  stub  at  the  foot  of  the  order  can  be 


328     MANUFACTURING  COSTS  AND  ACCOUNTS 

detached,  after  entry  on  a  weekly  statement  of  earnings  individual 
to  the  man  in  question,  and  then  included  with  the  day's  Time 
Sheets  for  entry  on  the  pay-roll,  and  later  passed  to  the  cost 
clerk  for  charging  to  Cost  Sheets. 

Figure  85  gives  a  specimen  ruling  for  an  individual  earnings 
record  as  applied  to  ordinary  piecework,  and  Fig.  86  a  similar 
record  arranged  for  Premium  or  bonus  earnings.  These  blanks 
are  practically  the  only  special  arrangements  necessary  to  bring 
piecework  or  premium  systems  into  the  scheme  of  the  general 
accounting,  but  the  remarks  in  Chap.  IX  (Part.  II)  as  to  veri- 
fication of  the  authority  and  the  amount  of  earnings  should  be 
kept  in  mind. 

After  the  pay-roll  has  been  entered  up  from  the  Time  Sheets 


Man 

Clock  No. 


PREMIUM  EARNINGS  STATEMENT 
Dept. 


W.E. 


Prod. 
Order 


Comp 

Order 

No 


Time 
All'ce 


Totals 


Time 
Taken 


Time 
Saved 


Prem, 

per  Hour 

Saved 


Balance 
Due 


Fig.  86. — Weekly  statement  of  premium  worker's  earnings. 

and  piecework,  bonus  or  premium  notes,  the  individual  cards 
(or  the  cut  up  Bed  ions  if  the  section  Time  Sheet  is  used)  must  be 
sorted  into  three  groups,  namely,  Standing  Orders,  Production 
Orders  and  Plant  Addition  Orders,  the  amounts  chargeable 
against  each  departmenl  being  kept  separate.  The  respective 
totals  arc  t hen  entered  on  a  blank,  Fig.  87,  which  thus  shows  the 
distribution  of  wages  to  the  i  hree  classes  of  orders  in  each  depart- 
menl separately.  The  total  lor  the  day  as  entered  on  this  blank 
will,  of  course,  be  agreed  exactly  with  the  total  for  the  day  as 
entered  in  the  pay-roll.  By  this  procedure  the  fact  that  every 
cent  shown  on  the  pay-roll  is  represented  on  the  Time  Cards  or 
Section-,  thus  proving  this  step  of  the  accounting.  Further 
menl  will  be  made  later  to  prove  that  all  these  items  have, 


COSTING  ON  METHOD  B 


329 


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330      MANUFACTURING  COSTS  AND  ACCOUNTS 

as  a  matter  of  fact,  reached  and  been  accurately  recorded  on 
individual  Cost  Sheets. 


COLLECTING    STANDING    ORDER    COSTS    AND     CHARGING    TO 

BURDEN 

When  all  the  wages,  material  and  sundry  works  expense  items 
for  the  month  have  been  posted  to  the  different  classes  of  Cost 
Sheets,  the  preparation  of  Burden  Journal  may  commence. 
Fig.  SS  shows  such  a  journal  arranged  in  conformity  with  the 
scheme  of  Standing  Orders  as  given  in  Fig.  56.  The  use  of  the 
journal  will  be  understood  from  inspection  of  the  rulings. 
Columns  are  provided  for  each  of  the  non-productive  and  pro- 
ductive departments,  and  alongside  each  column  the  Standing 
<  >rder  numbers  affecting  each  department  are  given.  To 
ascertain  the  total  burden  chargeable  against  each  department, 
the  total  of  each  Cost  Sheet  is  entered  opposite  its  Standing  Order 
number.  When  all  the  Standing  Order  number  spaces  are  so 
filled  out  the  statement  of  burden  will  be  complete.  In  many 
,  however,  the  items  relating  to  depreciation,  rents,  insur- 
ance, etc.  which  come  from  the  schedules  will  be  entered  direct 
on  the  Burden  Journal,  without  passing  through  Cost  Sheets. 
This  is  simply  a  matter  of  convenience — a  short  cut — as  obviously 
there  being  only  one  entry  each  month  for  each  of  these  items 
it  is  hardly  worth  while  to  go  through  the  formality  of  entering 
them  on  ( Josts  Sheets,  to.be  immediately  closed  and  transferred 
t  o  t  he  journal.  Theoretically,  however,  they  should  be  posted  to 
Cost  Sheets,  in  accordance  with  the  principle  that  each  Standing 
Order  number  is  represented  by  its  individual  Cost  Sheet. 

When  entering  any  group  of  Cost  Sheets  in  the  journal,  as 
i<>r  instance  the  02  group,  "Repairs  to  Building  Structure," 
opportunity  is  taken  to  aggregate  all  wages,  all  material,  and  all 
work-  expense  od  the  sheets  and  place  it  on  the  corresponding 
line  on  the  left  hand  of  the  journal,  under  the  corresponding 
columns.  In  this  way  each  line  of  the  journal  provides  charges 
to  departments  on  the  riuht-hand  side  and  credits  to  the  main 
j  accounts  on  the  other  (compare  general  diagram).  The 
same  procedure  is  gone  through  with  regard  to  all  other  entries, 
so  that  when  all  i  he  Standing  Order  Cost  Sheets  (and  all  the 
entries  from  schedules)  have  been  completed,  and  all  columns 
totalled,  we  have  a  complete  story  of  credits  to  the  main  ledger 


COSTING  OF  METHOD  B  331 

accounts  on  the  left  side  and  a  complete  story  of  charges  to 
departments  on  the  other.  The  credits  are  then  made  in  due 
course,  and  thus  finally  disposed  of. 

The  right-hand  side  of  the  journal  requires,  however,  a  further 
operation.  The  totals  appearing  against  the  non-productive 
departments  require  to  be  prorated  over  the  productive  depart- 
ments on  the  basis  of  the  call  on  the  service  made  by  each  pro- 
ductive department.  When  this  is  done,  then  all  the  amounts 
represented  by  credits  will  be  balanced  exactly  by  charges  to  the 
productive  departments. 

This  is  exactly  the  same  procedure  as  described  in  connec- 
tion with  Method  A.  And  with  the  exception  that  in  Method 
A  operative  wages  are  included  in  burden,  the  ground  covered 
by  the  two  journals  is  the  same,  only  the  journal  suggested  for 
Method  B  is  more  highly  developed,  and  goes  into  greater  detail 
with  regard  to  the  items  of  expense. 

The  following  agreements  will  have  to  be  made  at  this  stage: 

The  total  of  Stores  account  credit  column  must  agree  with  the 
aggregate  of  all  columns  in  the  Stores  Issues  Summary  (Fig.  39a) 
relating  to  issues  against  Standing  Orders. 

The  total  of  depreciation  credit  column  must  agree  with  the 
total  for  the  month  shown  as  chargeable  against  the  factory 
in  the  Depreciation  Schedule.  The  rents,  etc.  column  must 
similarly  agree  with  the  totals  shown  as  chargeable  in  the  Rents, 
Insurance,  etc.  Schedule. 

The  total  in  the  wages  credit  column  must  agree  with  all 
columns  in  the  Pay-roll  Distribution  Summary,  Fig.  87,  relating 
to  Standing  Orders.  The  total  in  the  salaries  credit  column  must 
agree  with  the  amount  chargeable  for  the  month  against  factory, 
unless  salaries  are  included  in  Pay-roll  Summary,  in  which  case 
this  column  will  not  be  required. 

The  total  in  the  works  expense  account  credit  column  will  be 
agreed  with  such  items  in  the  Works  Expense  account  as  are 
chargeable  against  Standing  Orders. 

The  total  in  the  Spoilage  account  credit  column  must  agree 
with  balance  in  Spoilage  account,  the  assessment  of  which  against 
productive  departments  will  have  been  made  by  virtue  of  a 
memorandum  authorized  by  the  superintendent. 

All  these  agreements  having  been  made,  the  correctness  of  the 
data  may  be  assumed.  Finally,  the  cross-total  of  all  credit 
columns  must  be  agreed  with  the  cross-total  of  all  productive 


332      MANUFACTURING  COSTS  AND  ACCOUNTS 


Or 

Stores 
Acct. 

Cr. 

Depreo. 

Acct. 

Cr. 

RentsAc 
Acct. 

Cr. 
,.\Vks. 
Acct. 

Cr. 

Salaries 
Acct. 

Cr. 
\Vk9. 

Exp. 
Acct. 

Cr. 

Spoilage 
Acct. 

Cr. 

Item  of  Expense            \ 

Depreciation  of  Buildings  *c       1 

Rents     Insurance  ic     ■' 

Repairs  B'ldg  Structure                1 

"         B'ldg  Equipment             i 

1 

Current  for   Lighting 

Steam  for  Heating 

Painting  &  Kalsomining              | 

Cleaning  Windows 

Other  Sweeping  &  Cleaning        | 

8nndry  Supplies                               \ 

Deprec.  Cranes.  Trucks,  Fixtures 

Insurance  Ditto 

Repairs  Ditto 

Wages,  Cranemen,  Handlers 

Salaries.  Storekeeper,  Clerks 

Sundry  Supplies 

Wages  of  Foremen 

Share  of  Administrative  Sal.      \ 

Sal.  Supt.  &   Prod     Staff 

1 

Deprec'n  Office  Equipment 

Insurance  Ditto 

Repairs  Ditto 

Stationery,  Books,  Blanks 

Phones.  Telegrams,  Postages 

Wages,  Watchmen,  Messengers 

Salaries    of  Clerks 

Sundry  Supplies 

Deprec'n  Power  Equipment 

Insurance  Ditto 

Repairs,  Ditto,  in  Power  Plant  I 

"             •>        >>  elsewhere 

Fuel 

Feed  Water' 

Wages  in  Power  Plant,  Boiler 

•  •         >•          ••          "  Engines  &( 

8undry  Supplies,  Oil  etc 

Deprec'n  Machines  &  Benches 

Insurance        "            »          >• 

Repairs              n            >>           i>         1 

Cleaning  &  Oiling     .,          •■         \ 

Fig  88    Burden  Journal                                                     \ 
Collects  all  Factory  Expense  per  Standing  Orders  and  Schedules                / 
and  Distributes  Non-Productive  Department  Expense  over  Productive   Depts. 

Credits  Ledger  Accts.ivith  all  Expenditure  on  Manufacturing  except            / 

Direct  Material  and  Direct  Wages 
lUBI  Mirked  (*)  In  Total  Column  amy  Uu  entered  direct  from  Schedules  or  Tbro.Cost  8heetB  1 

Fig.  88. — Burden  Journal 


COSTING  ON  METHOD  B 


333 


Total 

All 

Depts 

Dept.l 

Supt.i 

Prod. 

Dept.2 
Fact. 
Offices 

Dept.3 
Stores 

Dept.4 
Power 
Plant 

Dept.5 
Pro- 
ductive 

Dept.G 
Pro- 
ductive 

Dept.7 
Pro- 
ductive 

Dept.S 

Pro- 

ductive 

* 

100 

200 

300 

400 

E00 

000 

700 

800 

* 

101 

201 

301 

401 

501 

C01 

701 

801 

102 

202 

302 

402 

502 

602 

702 

802 

10:1 

203 

303 

403 

503 

603 

703 

803 

101 

204 

304 

404 

504 

604 

704 

804 

105 

205 

305 

405 

505 

605 

705 

805 

106 

206 

306 

40C 

506 

606 

700 

80fl 

107 

207 

307 

407 

507 

007 

707 

B07 

108 

208 

308 

403 

508 

608 

708 

808 

109 

•Jii'l 

309 

409 

509 

f.0'1 

709 

80' 1 

* 

320 

520 

620 

720 

8-20 

* 

321 

521 

621 

721 

S.'l 

322 

522 

622 

722 

822 

327 

527 

627 

727 

827 

328 

1 

329 

529 

629 

729 

829 

137 

437 

537 

637 

737 

a37 

138 

* 

140 

240 

340 

440 

540 

641 

740 

840 

* 

141 

241 

341 

441 

541 

041 

741 

841 

142 

242 

342 

442 

542 

642 

742 

842 

144 

244 

344 

444 

544 

644 

744 

844 

145 

245 

345 

445 

545 

645 

745 

845 

147 

247 

347 

447 

547 

647 

747 

847 

148 

248 

348 

448 

548 

648 

748 

848 

149 

249 

349 

449 

549 

649 

749 

849 

* 

450 

550 

650 

750 

850 

* 

451 

551 

651 

751 

851 

452 

553 

653 

753 

653 

454 

455 

457 

458 

459 

559 

659 

759 

859 

* 

560 

660 

760 

860 

* 

561 

661 

761 

861 

502 

662 

762 

B82 

563 

663 

763 

BBS 

" 

]    Prorating  of  Dept.2 

1                        Prorating  of  Dept.3 

)                                          Prorating  of  Dept.l 

= 

------ 

= 

= 

= 

= 

= 

= 

as  per  Details 
jNote.  These  items(%4:)to  b 

below:Prorating  Qt  power 

j.     .,            ..  Lighting 

omitted  here  if  included  ahove 
)                                                                  * 

%    .,           ft  Heating 

[ 

(Method  B). 


:;:;!      MANUFACTURING  COSTS  AXD  ACCOUNTS 


pq 


departments  columns,  when  the  operations  on  this  journal  are 

completed.  The  main 
ledger  accounts  will  be 
credited  with  their  respective 
credits,  and  the  Depart- 
mental Burden  accounts  will 
be  charged  with  the  amounts 
shown  in  the  respective  pro- 
ductive department  columns 
(see  general  diagram).  All 
the  expenditure  of  the  fac- 
tory on  service  has  now  been 
allocated  to  productive  de- 
partments, and  the  elements 
of  this  service,  namely,  wages, 
materials,  depreciation,  etc., 
have  been  duly  credited  to 
the  main  ledger  accounts. 

Distributing  Departmen- 
tal Burden  over  Production 
Order  Cost  Sheets. — Having 
now  ascertained  the  amount 
of  burden  chargeable  against 
each  productive  department, 
the  next  step  is  to  list  all  the 
Production  Order  Cost  Sheets 
(including  Plant  Addition 
Cost  Sheets)  so  that  we  may 
distribute  the  proper  share 
of  burden  to  each,  in  pro- 
portion either  to  the  pro- 
ductive or  direct  wages  ex- 
pended on  each,  or  (if  that 
plan  is  preferred)  in  propor- 
tion to  the  productive  hours 
worked  on  each.  The  first 
step  is  to  provide  a  medium 
for  the  listing.  Such  a 
medium  is  the  Depart- 
mental Man  ufacturing 
Journal     (Fig.     89),    which 


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COSTING  ON  METHOD  B  335 

provides  spaces  for  entering  the  individual  Componenl  Order 
Cost  Sheets,  stating  their  respective  Production  Order  and 
Component  Order  numbers,  the  total  hours  worked  in  the 
month  on  each  one,  the  amount  of  wages  charged  against  each 
one,  the  value  of  the  material  charged  against  each  one  (if  the 
material  is  not  dealt  with  separately  by  means  of  Material  (  lost 
Sheets  as  outlined  above),  and  any  items  of  works  expense  that 
may  be  chargeable.  Three  total  columns  are  also  provided, 
and  the  total  of  the  costs  after  burden  is  added  will  be  placed 
in  one  of  these  three  according  to  whether  the  order  is  for  Pro- 
duction, Plant  Addition  or  is  a  Replacement  (Spoilage)  Order 
(see  Chap.  IX,  Part  I). 

When  all  the  orders  have  been  listed  and  totalled  in  columns, 
certain  agreements  are  necessary: 

The  total  of  wages  column  in  the  journal  must  agree  with 
the  total  of  productive  wages  and  plant  addition  wages  as 
shown  for  that  department  on  the  Pay-roll  Distribution  Sum- 
mary (Fig.  87). 

The  total  of  material  column  in  the  journal  must  agree  with 
the  totals  of  stores  issued  to  Production  Orders  and  Plant 
Addition  Orders  in  the  Stores  Issues  Summary  to  that  de- 
partment (see  Fig.  39a). 

The  total  of  works  expense  column  in  the  journal  must  agree 
with  the.  total  of  works  expense  items  in  the  Works  Expense 
account  chargeable  against  Production  Orders  (this  will  be  a 
very  unusual  occurrence). 

When  these  agreements  are  effected,  Wages  account,  Stores 
account  and  Works  Expense  account  will  be  credited  with  the 
totals  of  the  respective  columns,  so  that  all  charges  against  direct 
production  will  now  have  been  credited  to  the  main  ledger 
accounts,  in  the  same  way  as  the  charges  for  indirect  expense  or 
service  were  credited  through  the  Burden  Journal.  All  the 
charges  against  factory  will  now,  in  fact,  have  been  so  credited. 

The  next  step  is  to  provide  for  the  distribution  of  depart- 
mental burden  which  has  been  collected  in  the  Departmental 
Burden  account  over  Production  Order  and  Plant  Addition 
Order  Cost  Sheets.  This  distribution  may  be  effected  on  one 
of  two  plans,  either  on  the  total  productive  hours  as  indicated 
by  totalling  the  "Hours"  column  of  the  journal,  or  on  the  total 
productive  wages  as  indicated  by  the  total  of  the  wages  column. 
Fig.  90  is  a  convenient  blank  for  use  with  the  first-mentioned 


33G      MANUFACTURING  COSTS  AND  ACCOUNTS 


plan.  The  first  line  of  the  blank  is  filled  out  with  an  amount 
equal  to  the  balance  in  the  Departmental  Burden  account,  the 
second  line  is  filled  out  with  the  total  productive  hours  worked 
in  the  department,  as  just  found  by  adding  the  "Hours"  column, 
and  then  by  dividing  the  burden  amount  by  the  total  hours  we 
find  the  burden  cost  of  1  hr.,  or,  as  it  is  usually  expressed,  the 
"departmental  hourly  burden." 

Having  found  this  multiplier,  the  next  step  is  to  multiply 
the  hours  set  down  against  each  individual  order  by  it.  The 
resulting  figure  will  be  the  departmental  burden  chargeable 
against  that  order,  and  it  is  entered  in  the  column  headed 
"Burden."  When  all  orders  have  been  thus  treated,  the 
column  headed  "Burden"  is  totalled,  and  should  obviously 
equal  exactly  the  amount  standing  as  a  balance  in  Departmental 


Departmental  Burden 

s 

Total  Hours  Worked 

Dept'l  Hourly  Burden       $ 

Departmental  Burden 

$ 

Total  Productive  Wages 

$ 

Dept'l  Burden    % 

% 

Fig.  00. — Determining  ratio  of  bur- 
den on  hourly-burden  plan. 


Fig.  91. — Determining  ratio  of  bur- 
den on  percentage  plan. 


Burden  account,  and  this  agreement  having  been  made,  Burden 
acouni  is  credited  with  the  amount. 

Bach  line  of  the  journal  is  then  cross-totalled,  so  that  the 
amounts  for: 

Wages 

Burden 

Material 

Works  expense 
standing  against  each  order  number  are  aggregated.  The  total  of 
these  is  then  placed  either  in  Manufacturing  account  column,  if 
the  order  i-  a  Production  Order;  or  in  Plant  Additions  account 
column,  if  the  order  is  a  Plant  Additions  Order;  or  in  Spoilage 
account  column,  if  the  order  is  a  Replacement  Order.  Each  of 
these  columns  is  i  hen  totalled. 

A  final  agreement  must  then  be  made.  The  aggregate  of 
the  four  credit  columns  headed  wages,  burden,  material,  sundry 
work-   expense,    must  rith    the   aggregate   of  the  three 


COSTING  ON  METHOD  B  337 

debit  columns,  Manufacturing  account,  Plant  Additions  account 
and  Spoilage  account.  This  being  effected,  these  three  ledger 
accounts  are  charged  with  the  totals  of  the  respective  columns, 
and  the  round  of  operations  on  Manufacturing  Journal  is  then 
complete. 

All  the  charges  against  factory  of  whatever  kind,  will  now 
have  found  their  place  in  one  of  these  three  accounts,  and  the 
detail  of  such  amounts  will  be  represented  by  the  individual  Cost 
Sheets.  It  should  be  explained,  however,  that  the  items  cal- 
culated as  burden  against  each  individual  order,  are  posted  to 
the  corresponding  Cost  Sheets  (Fig.  83)  as  soon  as  the  total 
has  been  agreed  with  the  balance  in  Burden  account.  Every 
item  of  expenditure  made  by  the  factory,  including  such  charges 
as  depreciation,  etc.,  are  now  represented,  in  one  form  or  other, 
on  the  Production  (and  Plant  Addition  Cost  Sheets)  that  is  to 
say,  either  as  direct  wages,  direct  material,  direct  works  expense 
(negligible  in  importance)  or  as  burden.  Certain  of  these 
Production  Order  Cost  Sheets  will,  however,  represent  work 
that  has  become  valueless  for  some  reason  or  other,  and  thus 
is  chargeable  against  Spoilage  account.  The  others  remain  as 
good  assets,  and  form  the  detail  as  just  mentioned  of  the  Manu- 
facturing account  and  (if  there  is  one)  of  the  Plant  Additions 
account. 

If  the  percentage  method  of  distributing  burden  is  employed 
instead  of  the  hourly  burden  plan,  all  the  foregoing  is  unchanged, 
except  that  a  blank  like  Fig.  91  is  used  for  determining  the 
basis  of  distribution.  The  total  of  departmental  burden  is,  as 
before,  placed  in  the  upper  space  on  the  blank,  but  immediately 
below,  instead  of  the  total  productive  hours,  the  total  productive 
wages  is  inserted.  The  ratio  between  such  wages  total  and  the 
burden  total  is  then  found  and  expressed  as  a  percentage.  Thus 
if  wages  are  $400  and  burden  is  $300  we  say  that  burden  is  75 
per  cent,  of  wages.  If  wages  are  the  same  but  burden  is  $600, 
burden  is  called  150  per  cent,  of  wages.  This  percentage  figure 
is  applied  as  a  multiplier  to  each  individual  order  just  as  the 
hourly  value  was  applied,  and  the  resulting  figure  is  set  down  in 
the  burden  column  and  posted  to  the  Cost  Sheet  in  precisely  the 
same  way 

Some  authorities  consider  the  hourly  burden  plan  a  great 
improvement  over  the  percentage  plan,  but  as  usually  employed 
the  present  writer  does  not  consider  there  is  any  great  difference 

22 


338      MANUFACTURING  COSTS  AND  ACCOUNTS 

in  accuracy  between  them.  In  the  circumstances  under  which 
alone  Method  B  is  accurate,  discussed  above,  the  hourly  plan  is 
somewhat  more  accurate  than  the  percentage  plan,  but  as  B 
is  applied  to  all  sorts  of  circumstances,  it  is  hard  to  say  whether, 
as  a  general  principle,  the  hourly  plan  always  maintains  its 
superiority.     It  will  depend  very  much  on  the  individual  case. 

Normal  Burden. — The  term  "normal"  burden  is  sometimes 
applied  to  the  hourly  burden  or  percentage  figure  obtained  in  a 
depart  men!  when  all  the  resources  of  the  department  are  fully 
employed  and  production  is  consequently  at  a  maximum. 
Omitting  the  considerations  of  overtime  (which  might  be  con- 
sidered in  tins  connection  as  a  kind  of  "forced-draft"  working) 
it  will  be  obvious  that  under  such  circumstances  the  ratio  between 
the  cost  of  service  (burden)  and  productive  activity  is  at  a  mini- 
mum. This  normal  burden  figure  represents  the  figure  that 
should  be  used  in  estimating,  because  it  represents  full  employ- 
ment of  the  manufacturing  capacity  of  the  plant,  and  any  higher 
figure  than  this  represents  the  influence  of  unfavorable  circum- 
stances and  a  consequent  waste  of  manufacturing  capacity  due 
to  pari  of  the  plant  being  idle.  This  function  of  normal  burden 
has  recently  been  announced  in  certain  quarters  as  a  remarkable 
and  new  discovery,  but  it  has  always  been  known  to  cost  specialists 
and  applied  daily  for  many  years.  But  it  must  be  remembered 
that  the  application  of  normal  burden  to  any  individual  job  is 
strictly  dependent  for  its  accuracy  on  the  suitability  of  Method 
B  for  the  industry  in  question.  If  Method  B  is  in  use  under 
circumstances  in  which  it  does  not  give  correct  cost,  then  reliance 
on  normal  burden  in  estimating  might  easily  lead  to  grave  error 
and  loss. 

Normal  burden  is  also  dependent  on  the  possibility  of  keeping 
the  plant  full  of  work  at  all  times.  That  is  to  say  that  it  will  not 
apply  to  any  industry  in  which  there  are  seasonal  variations. 
To  apply  it  to  such  conditions  would  lead  to  serious  consequences, 
inasmuch  as  the  busy  seasons  have  to  pay  for  the  slack  seasons 
Normal  cosi  in  such  a  case  would  have  to  be  an  averaged  cost. 
The  whole  course  or  cycle  of  seasonal  costs  would  have  to  be 
reviewed,  and  a  normal  burden  fixed  on  that  would. cover  the  cost 
of  enforced  idleness  in  ^lack  seasons.  Otherwise,  if  prices  were 
based  on  the  minimum  cost  observed  in  busy  seasons,  it  would  be 
too  low.  Not  Bufficienl  profit  would  be  made  in  the  busy  season 
to  pay  for  the  heavy  charges  of  the  slack  season. 


COSTING  ON  METHOD  H  339 

Prorating  Burden  on  Quantity  or  Weight. — In  certain  indus- 
tries where  the  product  is  a  simple  one,  through  individual  lots 
may  require  more  or  more  skilled  labor  than  other  lots,  or  are 
paid  for  on  a  piecework  or  premium  basis,  and  must,  therefore, 
have  direct  labor  charged  to  them,  the  department  burden 
may  nevertheless  bear  a  closer  ratio  to  weight  or  quantity  pro- 
duced than  to  either  time  taken  on  the  job  or  to  wages  paid  on  it. 
In  such  cases  the  total  weight  or  quantity  of  the  output  must  be 
ascertained  and  burden  divided  by  it.  The  result  will  be  a 
burden  charge  per  hundred,  or  per  pound.  Then,  when  entering 
orders  on  Manufacturing  Journal,  the  quantity  or  weight  pro- 
duced on  each  order  is  given  (instead  of  hours  worked)  and  this 
multiplied  by  the  above  burden  charge  will  give  the  burden 
chargeable  to  the  order. 

Molding-floor  costs  in  foundries  are  frequently  arranged  on  this 
plan — tonnage  burden  being  substituted  for  hourly  burden  or 
percentage  on  wages  burden. 


CHAPTER  XIX 

COSTING    ON     METHOD     C     (SCIENTIFIC    MACHINE 

RATE  PLAN) 

It  has  been  pointed  out  in  former  chapters  that  the  line  of 
approach  to  accuracy  in  cost  keeping  is  adequate  departmental- 
ization. In  proportion  as  we  isolate  unlike  processes  and 
machines  and  skills,  the  clearer  the  connection  between  cost  and 
individual  items  of  product  will  be  perceived.  As  has  already 
been  pointed  out  the  three  methods  A,  B  and  C  are  three  degrees 
of  approach  to  the  elimination  of  averaging.  In  A  all  expenses 
and  all  productive  wages  were  considered  to  average  over  all 
jobs  in  proportion  to  time  taken.  In  B  expense  only  was  con- 
sidered to  average  in  this  way,  and  direct  wages  were  charged 
against  individual  orders.  In  Method  C,  now  to  be  described, 
mechanism  is  introduced  to  identify  all  expense  with  the  cost  of 
working  individual  machines,  or  "production  centers,"  so  that 
each  machine  becomes  as  it  were  a  separate  department,  with  an 
accurately  determined  departmental  cost.  We  have  then  only 
to  determine  how  long  each  order  has  remained  in  the  depart- 
ment (or  in  other  words  how  long  it  has  been  operated  on  at  the 
machine)  to  find  its  due  and  proper  charge  for  machine  service. 
And  as  direel  wages  are  on  this  method,  as  in  Method  B,  charged 
against  each  Production  Order,  it  is  evident  that  we  have  here 
the  closest  degree  of  accuracy  that  is  possible  in  any  system  of 
costing. 

But  as  explained  in  previous  chapters,  this  method  is  neces- 
sary only  when  a  department  contains  equipment  varying  to  a 
considerable  degree  amongst  itself.  Where  a  department  con- 
tains  20  machines  or  production  centers  of  any  kind,  all  practi- 
cally alike  then  Method  ( '  affords  no  advantage  over  B  when  B 
ie  applied  on  the  hourly  burden  plan. 

The  organization  of  costing  on  Method  C  naturally  falls  into 
two  main  divisions,  one  connected  with  the  finding  of  the  burden 
charge  againsl  each  department,  and  the  other  connected  with 
the  determination  of  the  amount  chargeable,  of  this  total,  against 
each  production  center. 

340 


COSTING  ON  METHOD  C  341 

The  method  of  collecting  the  various  items  of  service  expense, 
and  distributing  it  to  departments  as  burden  is  precisely  the  same 
as  that  described  for  Method  B.  This  is  obviously  so,  because, 
as  already  explained  Method  C  deals  exclusively  with  the  dis- 
tribution of  such  burden  expense  within  the  department.  The 
form  of  the  Standing  Orders,  the  pay-roll,  the  stores  issues  sys- 
tem, and  the  Depreciation  Schedules  will,  therefore,  not  require 
special  description,  inasmuch  as  they  are  the  same  as  just 
described  in  the  last  chapter. 

New  matter  in  connection  with  Method  C  will  deal:  (1)  with 
the  form  of  Time  Sheets,  Standing  Order  and  Production  Order 
Cost  Sheets,  Plant  Addition  Cost  Sheets,  and  Manufacturing 
Journal,  all  of  which  require  additional  columns  to  record  the 
machine  time  and  machine  earnings  (which  are  machine  time 
multiplied  by  a  machine  rate,  just  as  a  man's  earnings  are  his 
time  multiplied  by  his  wage  rate);  and  (2)  the  various  blanks 
required  for  subdivision  of  the  normal  departmental  burden  into 
production  center  burden.  This  last  mechanism  is  equivalent 
to  a  sub-departmentalization  of  the  department  into  its  ultimate 
production  centers,  or  nearly  so.  This  latter  determination 
is  carried  out  only  at  long  intervals,  or  when  some  rearrangement 
within  the  department  has  disturbed  the  original  computation 
of  machine  rates. 

The  current  working  of  Method  C  will  be  seen  to  be  no  more 
difficult  or  laborious  than  that  of  Method  B  once  the  machine 
rates  have  been  determined  in  a  satisfactory  manner. 

As  the  working  of  Method  B  will  be  fresh  in  the  memory  of  the 
reader  we  shall  first  proceed  to  describe  the  actual  working  of  the 
method,  leaving  till  later  the  method  of  fixing  the  machine  rates. 
For  the  present  it  must  be  assumed  that  each  machine  is  provided 
with  a  machine  rate,  which  rate  is  made  up  of  elements  representing 
the  individual  call  of  that  machine  on  the  various  serivces,  as  mapped 
out  by  the  Standing  Order  system.  Thus  a  given  machine  rate^ 
may  be  made  up  of  a  large  charge  for  space,  a  small  charge  for 
power,  a  high  charge  for  supervision,  a  low  depreciation  rate  and 
so  forth,  the  aggregate  of  these  separate  charges  being  combined 
so  as  to  form  a  single  hourly  rate  chargeable  against  production  for 
the  use  of  that  machine.  Other  machines  will  have  these  various 
elements  of  service  combined  in  a  different  proportion,  so  that 
each  machine  will  have  its  individual  machine  rate,  much  as 
every  man  has  his  individual  wage  rate. 


342      MANUFACTURING  COSTS  AND  ACCOUNTS 

The  Order  System. — This  will  be  similar  to  that  described 
for  Method  B.  Standing  Orders  are  arranged  so  that,  as  regards 
cadi  department,  .the  groups  of  expense  relating  to  buildings, 
power,  etc.,  arc  segregated,  and  their  total  ascertained  separately. 
This  information  is  made  use  of  in  fixing  machine  rates  and  also 
in  applying  verification  from  time  to  time  as  to  the  accuracy  of 
the  ra 

Production  and  Component  Orders  will  be  also  similar  in  all 
l  to  those  described  for  Method  B. 

Cost  Sheets. — In  costing  on  Method  C  additional  columns 
must  be  provided  on  the  Cost  Sheets  in  which  the  amounts 
charged  through  machine  rates  to  each  order  can  be  recorded. 
An  additional  column  is  also  necessary  in  the  case  of  Production 


STANDING  ORDER  COST  SHEET 
For                                  Dent. 

No. 

Date 

Item 

Ilrs. 

Mach. 
Wages 

Earn. 

Mat'l 

Works 
Exp. 

Total 

r"     ^~ 

I  i-  'liny;  Order  Cost  Sheet  (Method  C)  for  engineering  shops. 

Order  or  Component  Cost  Sheets  only,  to  take  care  of  what  is 
known  as  supplementary  rate,  to  be  discussed  presently.  Stand- 
ing <  >rders  and  Plant  Addition  Orders  do  not  take  supplementary 
which  is  in  fad  a  mere  ratio  between  unused  manufacturing 
capacity  of  the  department  and  that  used  productively. 

Figure  92  shows  a  Standing  Order  Cost  Sheet.  This  differs 
from  thai  shown  for  Method  B  (Fig.  81)  in  having  a  column 
headed  "Machine  Earning  This  column  will  be  used  only  in 

engineering  plants,  where  it  may  happen  that  repair,  etc.  work 
ifl  done  by  one  department  for  another  to  a  Standing  Order 
number.  It  might  also  be  used  in  a  repair  shop  of  a  non-engi- 
neering factory  or  mill,  where  it  was  desired  to  make  use  of 
machine  rates  in  connection  with  the  repair  shop  machines.     As 


COSTING  ON  METHOD  C 


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344      MANUFACTURING  COSTS  AND  ACCOUNTS 

already  stated,  however,  this  is  usually  not  advisable.  Con- 
sequently the  provision  of  such  a  column  will  be  unnecessary  in 
the  case  of  Standing  Order  Cost  Sheets,  save  in  machine  shops 
that  may  undertake  occasional  or  regular  repairs  for  other 
departments.  The  use  of  such  a  column  does  in  fact  bring 
annoying  complications  into  play.  Additional  columns  have 
to  be  provided  in  Burden  Journal,  so  that  the  amounts  col- 
lected on  Standing  Order  ( lost  Sheets  in  this  way  can  be  credited 
to  the  Burden  account  of  the  department  doing  the  work.  In 
the  discussion  of  Method  C  that  follows,  it  will  be  assumed  that 
such  columns  are  not  in  use.  It  is  necessary,  however,  to  call 
attention  to  the  fact  that  under  certain  circumstances  they  are 
required  or  at  any  rate  are  advisable. 

Standing  Order  Cost  Sheets  similar  to  Fig.  82,  for  collection 
of  depreciation,  etc.,  items  from  schedules  can  also  be  used 
in  the  same  way  and  under  the  same  circumstances  as  described 
in  connection  with  Method  B. 

The  Production  Order  Cost  Sheet  (Fig.  93)  used  in  Method 
C  is  similar  to  that  described  in  the  last  chapter,  except  that 
no  "Burden"  column  appears.  Its  place  is  taken  by  a  column 
headed  "Machine  Earnings,"  which  is  double,  like  that  de- 
voted to  wages — the  left-hand  division  takes  care  of  the  daily 
entries,  while  the  right-hand  division  is  used  for  bringing  out 
totals  at  the  month  end,  in  the  way  already  described  for  wages. 
It  will  readily  be  understood  that  these  columns  receive  the 
entries  of  machine  rate  extensions,  that  is,  hours  worked  on  the 
job  multiplied  by  the  machine  rate  per  hour  that  has  been 
allotted  to  each  machine  in  the  department.  Another  column 
is  provided  for  "supplementary  rate"  an  item  which  is  dis- 
tributed  over  Production  Orders  after  Burden  Journal  is  made 
up  for  the  month,  much  in  the  same  way  as  burden  was  shown 
to  be  distributed  in  the  last  chapter.  The  meaning  of  supple- 
mentary rate  will  be  explained  later. 

General  Diagram  for  Method  C. — Figure  94  (p.  352)  shows  a 
general  diagram  for  Method  C  which  may  be  compared  with 
the  large  folding  general  diagram  for  Method  B.  This  diagram 
may  be  referred  to  in  reading  the  ensuing  detailed  description 
of  the  working  of  the  method. 

Distribution  of  Material. — There  is  no  difference  between 
Methods  B  and  C  in  regard  to  the  manner  in  which  material  is 
bandied  in  any  of  the  records. 


COSTING  ON  METHOD  C 


345 


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346      MAMI-ACTURING  COSTS  AND  ACCOUNTS 

Distribution  of  Wages. — While  no  difference  between  Methods 
B  and  C  exists  as  regards  the  handling  of  wages  items,  the  Time 
Sheets  or  Time  Cards  used  for  recording  men's  time  are  pro- 
vided with  an  additional  column  (see  Fig.  95  where  a  sectional 
Time  Sheet  otherwise  similar  to  Fig.  84  is  shown).  On  the 
extreme  right  will  be  seen  a  column  headed  "Machine  Earn- 
ings."  This  is  filled  out  by  the  cost  clerk  before  the  sheets  are 
dissected,  by  multiplying  the  "hours"  entry  by  the  machine 
rate.  This  should  be  done  after  the  sheet  has  been  checked 
with  gate  time  and  fully  completed  as  regards  wages.  In 
addition  to  being  a  wages  distribution  record,  the  sheet  thus 
becomes  a  machine  earnings  distribution  record. 

Collecting  Standing  Order  Costs  and  Charging  to  Depart- 
mental Burden  Accounts. — The  procedure  is  exactly  the  same 
as  that  described  for  Method  B  except  in  the  special  case  that 
Standing  Order  Cost  Sheets  are  provided  with  a  column  for 
machine  earnings,  and  this  exception  has  already  been  referred 
to  above. 

Distributing  Departmental  Burden  over  Production  Order 
Cost  Sheets. — At  this  point  Methods  B  and  C  part  company. 
Hitherto  the  differences  between  the  two  systems  have  been 
confined  to  extra  columns  in  certain  blanks  on  which  informa- 
tion could  be  recorded  as  to  the  machine  hours  taken  on  dif- 
ferent jobs,  and  the  extension  of  these  hours,  by  multiplying  by 
a  machine  rate,  into  money  value.  But  the  effect  of  this  pro- 
cedure, if  the  machine  rates  have  been  accurately  fixed,  is  that 
Production  Order  Cost  Sheets  have  already  been  charged  with 
burden,  inasmuch  as  the  machine  rates  represent  very  carefully 
worked  out  individual  charges  for  the  various  services  as  ab- 
sorbed by  the  different  machines  or  production  centers.  When, 
therefore,  we  list  all  Production  Orders  and  Plant  Addition 
Orders  in  a  Departmental  Manufacturing  Journal  (Fig.  96) 
at  the  month  end,  we  shall  obtain  a  total  of  burden  so  dis- 
tributed, and  it  will  be  a  matter  of  interest  to  observe  whether 
the  amowrl  so  distributed  is  actually  the  same  as  the  amount 
Btanding  to  the  debil  of  Departmental  Manufacturing  account. 

l\  the  shop  is  working  full  time,  and  there  has  been  no  lack  of 
order-,  then  the  amount  distributed  by  machine  rates  to  Orders 
should  be  exactly  or  very  nearly  the  same  as  the  amount  to 
debil  of  Departmental  account.  Jf  this  is  not  the  case,  under 
the  circumstances   mentioned,   then  some  error  has  occurred  in 


COSTINO  OF  M  FT HO  I)  C 


347 


fixing  machine  rates,  or  some 
It  is,  of  course,  important  at 
the  outset  to  be  able  to  de- 
termine which  of  these  two 
causes  has  been  concerned  in 
the  result. 

The  use  of  Manufacturing 
Journal  will  be  easily  under- 
stood from  inspection  of  Fig. 
96.  It  is  the  same  as  that 
shown  for  Method  B  with  the 
exception  that  instead  of  a 
column  headed  "Burden"  we 
have  a  column  headed  "Ma- 
chine Earnings"  which,  as  ex- 
plained above,  takes  its  place ; 
and  another  column  headed 
uSupplementaryRate"theuse 
of  which  will  now  be  explained. 

Supplementary  Rate. — If, 
when  all  the  Production  and 
Plant  Addition  Orders  for  the 
month  have  been  listed  and 
totalled  in  Manufacturing 
Journal,  we  find  that  the 
amount  in  "Machine  Earn- 
ings" column  is  equal  to  the 
balance  against  the  depart- 
ment in  the  Burden  account, 
then  it  is  evident  that  when 
the  posting  has  been  effected 
there  will  be  no  balance  left  in 
Burden  account.  This  is 
equivalent  to  saying  that  all 
the  burden  has  already  been 
distributed  to  Orders  by  means 
of  machine  rates.  In  that 
case  there  is  obviously  no 
further  distribution  possible, 
and  no  "supplementary  rate" 
will  be  required. 


inefficiency  in  the  shop  exists. 


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348      MANUFACTURING  << >STS  AND  ACCOUNTS 

But  this  exact  distribution  is  contingent  (assuming  for  the 
moment  that  all  machine  rates  are  correctly  fixed)  on  every 
machine  having  worked  full  time.  If  it  should  happen  that  a 
number  of  machines  have  worked  less  than  full  time,  then  it 
becomes  obvious  that  the  machine  earnings  which  they  would 
have  discharged  on  to  Orders  if  they  had  been  working  on  orders 
has  not  been  distributed  at  all.  When  this  happens,  it  is  also 
obvious  that  the  credit  from  machine  earnings  column  in 
Manufacturing  Journal  will  not  wipe  out  the  balance  standing 
against  the  department  in  Burden  account,  but  that  a  balance  of 
greater  or  less  amount  will  still  remain  against  the  department. 

Now,  it*  we  also  reckon  up  the  value  of  the  machine-hours  on 
the  various  machines  that  have  not  been  charged  to  Orders,  that 
is,  which  for  some  reason  or  other  have  stood  idle,  then  this 
amount  must  either  be  equal  to  or  more  than  the  balance  in 
Burden  account.  If  the  balance  in  Burden  account  is  greater 
than  the  amount  of  machine  earnings  thus  listed  as  idle,  then  it 
i<  evident  that  machine  rates  are  at  fault,  since  if,  instead  of  their 
being  idle,  all  machines  had  been  engaged  on  orders  and  had  so 
charged  their  earning  to  Orders  in  the  machine  earnings  column 
of  the  Manufacturing  Journal,  they  would  still  have  failed  to  wipe 
out  the  balance  in  Burden  account. 

But  if  the  amount  in  Burden  account  remaining  after  machine 
earnings  have  been  credited,  is  equal  to  the  value  of  the  idle 
machine  earnings,  then  obviously  everything  is  correct,  since 
if  1  hey  had  been  disl  til  >u1  ed  over  Orders,  they  would  have  become 
machine  earnings  and  so  have  wiped  out  the  balance  in  Burden 
account . 

On  the  other  hand,  it  may  be  found  that  the  machine  earnings 
Listed  a-  due  to  idle  time  would  amount  to  more  than  the  balance 
againsl  the  department  in  Burden  account.  This  is  likely  to 
be  the  case  if  the  rate  of  production  has  fallen  off,  and  orders  are 
scarce,  since  in  that  cast;  a  little  of  the  service  charges  against 
the  department  will  have  been  reduced  below  normal — the 
charge  for  power,  for  example,  though  not  falling  off  in  propor- 
tion as  production  fall-  off,  yet  is  reduced  to  some  extent  if  a  large 
percentage  of  idle  machines  obtains.  So  that  in  general  we  shall 
be  content  with  the  resull  if  the  balance  not  wiped  out  by 
machine  earnings  is  a  -mallei-  amount  than  the  value  of  machine 
earnings  calculated  ;,~  lost  due  to  idle  time. 

This  balance-  ha-  to  be  removed  from  Burden  account.     The 


COSTING  ON  METHOD  C 


349 


question  is,  first,  "what  does  it  represent?"  and  secondly,  "how 
shall  we  dispose  of  it?"     These  are  very  important  questions. 

The  answer  to  the  first  is  that  it  represents  waste.  And  the 
particular  variety  of  waste  it  represents  is  wasted  manufactur- 
ing capacity.  The  price  of  this  wasted  capacity  is  the  balance 
remaining  in  Burden  account  after  the  machine  earnings  charged 
to  Orders  have  been  credited.  It  is  now  easy  to  see  why  this 
balance  must  never  be  more  than  the  undistributed  machine 
earnings  would  amount  to.  It  is  because  the  price  of  the  wasted 
capacity  is  the  amount  of  those  earnings  less  any  economies 
that  have  been  effected  in  view  of  the  slack  condition  of  work. 
If  no  such  economies  have  been  effected,  then  the  balance  will  be 
equal  to  the  total  of  undistributed  machine  earnings.  In  no 
case  can  the  balance  ever  be  legitimately  more"  than  the  value  of 
the  undistributed  machine  earnings,  as  that  would  show  that 
some  items  had  escaped  being  represented  in  machine  rates. 


Total  Dep't'l   Burden 

Total  Machine  Earnings 

Balance % 

=  Supplementary    Rate 

Fig.  97. — Determining  supplementary  rate. 

These  assertions  must  be  taken  as  being  approximate.  Very 
small  variations  may  occur,  without  upsetting  the  general  prin- 
ciple involved.  It  will  hardly  ever  happen  that  no  balance  is  left 
in  Burden  account  after  machine  earnings  charged  to  Orders  have 
been  credited,  even  if  the  shop  is  working  full  time.  If  some  over- 
time is  worked  occasionally  during  the  month  a  slight  amount  of 
overdistribution  may  even  occur,  but  in  general  this  should  be  a 
trifling  percentage  of  the  amounts  handled.  A  certain  elasticity 
in  matters  of  this  kind  must  necessarily  be  allowed. 

As  a  matter  of  general  practice,  therefore,  any  balance  remain- 
ing in  Burden  account  after  machine  earnings  have  been  credited 
through  Manufacturing  Journal  must  be  distributed  as  a  supple- 
mentary rate  over  Production  Orders  only.  Such  distribution 
must  not  be  made  to  Plant  Addition  Orders,  as  that  would  be  to 


350      MANUFACTURING  COSTS  AND  ACCOUNTS 

include  an  item  of  waste  as  part  of  the  cost  of  plant,  thus  making 
an  illegitimate  profit  on  such  orders. 

Figure  97  shows  the  blank  used  in  calculating  the  percentage 
on  machine  earnings,  which  must  be  added  to  the  latter  in  order 
to  exactly  absorb  the  balance  against  the  department  in  Burden 
account.  The  total  amount  of  the  balance  before  crediting  is 
entered  in  the  upper  space;  the  total  of  machine  earnings  per 
Manufacturing  Journal  is  entered  in  the  second  space,  and  sub- 
tracted; the  result  is  placed  in  the  lower  space,  and  will  represent 
the  balance  yet  to  be  distributed.  This  is  expressed  as  a 
percentage  of  the  machine  earnings. 

Thus,  with  total  burden  charge  against  the  department  $3,000, 
machine  earnings  charged  to  Orders  $2,400,  the  following  entries 
would  be  made: 

Balance  in  Burden  accounts $3,000 

Deduct  machine  earnings 2,400 

Balance  undistributed   (waste) $     600 

GOO  being  25  per  cent,  of  $2,400,  supplementary  rate  is  25  per 
cent,  accordingly.  This  amount  has,  therefore,  to  be  charged 
to  all  Production  Orders  as  listed  in  Manufacturing  Journal. 
To  do  this  25  per  cent,  is  calculated  on  the  amount  of  machine 
earnings  standing  against  each  order  number,  and  the  resulting 
figure  is  placed  in  the  column  headed  supplementary  rate. 
When  this  operation  is  carried  out,  supplementary  rate  column 
is  totalled,  and  the  total  credited  to  Burden  account,  thus 
extinguishing  all  balance  in  that  account. 

If  Plant  Addition  Orders  are  included  in  the  Manufacturing 
Journal,  a-  they  probably  would  be  in  most  engineering  shops, 
then  ;i  slightly  different  procedure  must  be  followed.  After  the 
amount  ($600)  has  been  found  as  above,  the  percentage  must  be 
reckoned  not  upon  the  $2,400  but  on  such  less  amount  as  repre- 
sents machine  earnings  on  Productive  Orders  only.  Thus,  if 
$600  of  the  $2,400  wen.  on  Planl  Addition  Orders,  and  $1,800 
of  it  on  Production  Orders,  then  the  percentage  to  be  found  would 
be  thai  of  600  to  1,800,  namely  33.33  per  cent.,  and  this  percent- 
age when  applied  to  the  Production  Order  machine  earnings  only, 
would,  of  course,  yield  a  total  of  $600  in  the  supplementary  rate 
column,  as  before. 

When  all  these  operations  are  carried  out,  then  the  new 
amount-  due  to  calculated  supplementary  rate  are  posted  to  the 


COSTING  ON  METHOD  C  351 

respective  Cost  Sheets  in  the  same  way  as  burden  is  posted  to  the 
Cost  Sheets  in  Method  B.  Costing  operations  arc  then  complete, 
each  Production  Order  having  received  its  due  share  of  every 
kind  of  factory  expenditure,  and  none  of  the  latter  being  unac- 
counted for.  The  total  now  in  Manufacturing  account  will,  as 
before,  equal  the  aggregate  of  all  the  credits  made  to  the  main 
ledger  accounts  on  the  left  side  of  the  general  diagram.  The  way 
in  which  Manufacturing  account  is  credited  when  work  is  finished 
and  removed  from  the  department  will  form  the  subject  of  a 
separate  chapter.  It  is,  of  course,  the  same  for  all  three  methods 
of  costing. 

OTHER  DISPOSITIONS  OF  WASTED  MANUFACTURING  CAPACITY 

In  the  majority  of  cases  the  procedure  described  is  the  only  safe 
one.  There  will  often  be  a  small  supplementary  rate  even 
when  the  shop  is  full  of  work,  because  it  is  practically  impossible 
to  maintain  all  machines,  in  many  kinds  of  industries,  at  full 
work  during  a  whole  month.  In  other  industries,  however,  of  a 
non-engineering  character,  full  operation  is  common,  and  in  such 
the  absorbtion  of  burden  by  machine  earnings  should  be  very 
close  indeed. 

It  has  been  stated  (and  will  be  readily  understood  if  we  realize 
that  this  method  practically  makes  each  individual  machine 
into  a  separate  department  for  costing  purposes)  that  all  amounts 
not  passed  to  Orders  through  machine  earnings  are  waste.  If 
a  department  should  have  only  one  large  machine,  and  it  is 
used  only  half  its  time  in  a  particular  month,  through  slackness 
of  trade,  it  is  perfectly  obvious  that  half  the  expenses  of  the 
department  have  been  wasted.  Half  will  have  been  charged  to 
Orders  and  half  will  remain  uncharged.  This  uncharged  por- 
tion will  not  be  as  great  as  it  would  be  if  the  machine  were 
working,  inasmuch  as  power  at  least  will  be  cut  off,  and  probably 
other  expenses  will  be  curtailed  also.  Therefore,  something  of 
the  loss  which  would  otherwise  occur  will  have  been  saved. 
Still  there  will  be  a  considerable  loss,  not  50  per  cent,  of  the 
normal  charges  for  the  month,  but  say  80  per  cent,  of  this 
figure  (i.e.,  80  per  cent,  of  50  per  cent.). 

This  amount  is  that  which  is  distributed  over  the  produc- 
tion for  the  month  by  means  of  a  supplementary  rate.  But  it 
is  obvious  that  this  is  only  another,  and  roundabout,  means  of 


352      MANUFACTURING  COSTS  AND  ACCOUNTS 

ultimately  charging  it  to  Profit  and  Loss  account.  By  charging 
it  to  Production  Orders  we  increase  the  cost  of  the  latter,  and 
consequently  when  we  come  to  set  this  cost  against  selling  price 
so  as  to  ascertain  gross  profit,  such  profit  is  diminished  to  an 
extent  equal  to  the  amount  of  supplementary  rate  included  in 
the  cost. 

It  may  be  asked,  therefore,  why  the  balance  in  Burden  account 
should  not  be  charged  at  once  against  Profit  and  Loss  instead 
of  being  distributed  over  Production  Orders  and  so  made  into 
a  part  of  cost. 

Some  writers  advocate  this.  It  is,  of  course,  a  simplification 
of  the  method,  inasmuch  as  the  distribution  of  the  amount 
by  means  of  a  percentage  to  each  Production  Order  and  the 
posting  of  the  amount  to  each  Cost  Sheet  is  saved.  And  in 
certain  cases  the  method  may  be  adopted,  particularly  where 
departments  contain  few  machines  of  large  size,  performing 
more  or  less  regular  and  simple  processes.  But  there  are  often 
reasons  why  this  is  undesirable.  In  an  armor-making  plant, 
for  example,  the  wasted  manufacturing  capacity  due  to  no  work 
may  be  very  high.  Yet  it  is  very  desirable  to  express  this  loss 
as  a  percentage  of  actual  cost,  and  in  fact  make  it  part  of  such 
cost,  because  it  has  to  be  recovered  in  the  selling  price  of  the  armor. 

This  feature  of  the  matter  is  obviously  very  important. 
The  actual  time  cost  of  the  product  is  not  its  true  cost  unless  the 
market  is  of  such  a  nature  that  we  may  hope  to  fully  employ  our 
plant  at  all  normal  states  of  trade.  Not  all  industries  are  in 
this  position.  Plants  making  some  special  product  of  which  the 
demand  is  very  intermittent  must  provide  manufacturing 
capacity  capable  of  taking  care  of  such  demand  at  the  maximum 
period.  Perhaps  3  months  in  the  year  the  plant  may  be  very 
busy  and  ai  other  times  slack.  In  such  cases  the  wasted  manu- 
facturing capacity  in  the  slack  months  has  to  be  paid  for  by  the 
profits  made  throughout  the  year,  and  it  would  be  a  dangerous 
policy  to  charge  wasted  capacity  in  any  month  to  Profit  and 
Loss.  Il  would  tend  to  cover  up  important  facts,  and  give  a 
misleading  view  of  the  whole  situation.  On  the  other  hand, 
it  i-  very  valuable  to  know  what  proportion  of  factory  cost 
represents  actual  production  and  what  proportion  represents 
mere  idle  equipment.  If  for  no  other  purpose,  this  is  valuable 
from  the  point  of  view  of  manufacturing  efficiency.  The 
machine  rate  method  lias  this  virtue,  that  it  represents  the  true 


Pay  Kotl  Distribution  Summary 


Stores  Issues  Summary 


Depreciation  Acct, 


|    Dep„ 

•n  Schedule 

Inter 

st  Schedule 

Kenti 

Sec  Schedule 

Time  Sheets  Man  &  Machine 


Stores  Iss'jos  ?h>.:ets 


5; 


Costing   on   Method    C 

Departmental    Burden    Distributed 
by    Machine  Rates 
Wasted    Manufacturing    Capacity 
Expressed    as    Supplementary 


St.t; 

Order  C^>st  Sheet 

| 

I 

i 

5 

\\ 


Production  post 

Sheets 

1 

1 

_ 

i 

i 

t 

£ 

■r, 

3 

is 

s 

" 

£ 

S 

H 

Fio.  94.— General  diagram  for  Method  C. 


r 


COSTING  ON  METHOD  C  353 

shop  or  department  cost  of  the  product  at  all  periods  irrespective 
of  the  slackness  or  otherwise  of  the  shops.  If  it  takes  $40 
machine  time  to  do  a  certain  job  today  when  the  shop  is  busy, 
it  should  not  take  any  more  machine  time  next  month  when  the 
shop  is  slack.  But  if  the  machine  should  earn  $80  in  a  mouth, 
and  thus  be  capable  of  doing  two  such  jobs  when  the  work  is 
there  for  it  to  do,  that  is  no  reason  for  charging  $80  as  machine 
time  to  the  job  in  the  slack  season.  It  is  much  better,  and  will 
make  the  situation  much  clearer  to  everybody  if  we  express 
the  cost  of  the  job  in  the  slack  season  in  two  parts  thus: 

Machine  time $40 

Supp.  rate 40 

Factory  cost $80 

There  are  certain  cases  when  wasted  manufacturing  capacity 
might  be  required  as  a  separate  item.  Thus,  if  we  have  to 
maintain  a  repair  department  in  connection  with  our  product  in 
a  certain  locality,  the  prices  which  we  get  for  our  work  being 
regulated  by  competition,  or  at  any  rate  by  other  considerations 
than  actual  cost,  then  it  might  be  valuable  to  charge  the  cost 
of  wasted  manufacturing  capacity  to  a  special  account,  and  so 
later  to  Profit  and  Loss.  By  this  means  the  true  cost  of  doing 
the  work  would  be  known,  the  true  profit  on  each  order  would 
also  be  known,  and  the  loss  due  to  unemployed  capacity  of  the 
plant  would  be  kept  as  a  separate  item. 

No  clear  and  general  rule  can,  therefore,  be  laid  down  as 
to  whether  the  cost  of  wasted  manufacturing  capacity  should  be 
distributed  over  Orders  by  means  of  a  supplementary  rate  or 
charged  to  a  Waste  account  and  so  to  Profit  and  Loss.  If 
there  is  any  doubt  about  the  matter  in  a  specific  case,  then 
preference  should  be  given  to  the  distribution  method.  There 
are  certain  dangers  in  writing  off  wasted  capacity.  The  de- 
partment is  apt  to  take  the  view  that  their  responsibility  is 
relieved  thereby.  Now  it  does  not  follow  in  all  cases  that  this 
waste  is  due  to  the  conditions  of  trade.  It  is  also  sometimes 
due  to  poor  management.  Even  though  the  machine  time  of 
jobs  is  not  increased,  there  may  be  quite  remediable  slackness  in 
keeping  machines  at  work.  One  of  the  advantages  of  Method  C 
is  in  fact  that  it  focusses  attention  on  something  that  is  too 
frequently  neglected,  namely,  the  keeping  of  machines  at  work. 

23 


:;:.!      MANUFACTURING  COSTS  AND  ACCOUNTS 

In  many  plants  where  no  accurate  and  systematic  watch  has 
been  kept  on  this  matter,  it  is  surprising  what  the  application 
of  a  record  to  machine  performance  will  reveal.  Now  supple- 
mentary  rati',  or  rather  its  percentage,  is  to  some  extent  a 
barometer  of  idle  machines.  If  it  is  rising,  it  signifies  that 
machines  are  more  idle,  and  whether  this  is  justifiable  or  not  is 
soon  seen  from  a  reference  to  the  Order  Register. 

Summary  of  Method  C. — Method  C  has  now  been  described  as 
to  its  working  features,  though  the  manner  in  which  machine 
rates  are  fixed  and  verified  has  yet  to  be  discussed.  It  is  essen- 
tially a  method  of  measurement  of  burden  charges  in  proportion 
to  service  absorbed  by  individual  machines.  This  being  the 
case,  and  such  charges  being  reduced  to  a  cost  per  hour  for  each 
machine,  a  division  into  hours  that  have  been  employed  usefully 
to  make  product,  and  hours  that  have  been  wasted,  is  an  obvious 
one  And  if  it  were  not  the  case  that  idle  machines  mean  usually 
reduced  service  in  some  respect  or  other,  it  is  evident  that  we 
could  say.  simply,  that  the  cost  of  the  wasted  time  was  so  many 
hours  multiplied  by  the  machine  rate;  just  as  wTe  do  say  that  cost 
of  utilized  time,  as  applied  to  Orders,  is  so  many  hours  multiplied 
by  the  machine  rate.  Actually,  however,  it  will  be  something 
less  than  this,  since,  to  say  nothing  of  other  services,  an  idle 
machine  is  not  consuming  power. 

Therefore,  the  cost  of  wasted  capacity  is  not  the  wasted  hours 
multiplied  by  the  machine  rate  of  each  idle  machine,  but  simply 
the  difference  between  machine  time  charged  to  Orders  and  the 
total  burden  allocated  to  the  department  during  the  month. 

Having  ascertained  the  cost  of  wasted  capacity  in  this  way,  we 
must  get  it  out  of  Burden  account.  One  way,  and  the  usual  way, 
of  doing  this  is  to  prorate  it  over  Production  Orders  as  a  per- 
centage of  waste.  Another  way,  to  be  used  only  under  special 
circumstanceSj  is  to  charge  it  to  a  Waste  account,  and  so  later 
to  Profil  and  Loss. 

Iii  either  case  the  true  cost  of  doing  the  work,  when  direct 
Labor  and  direcl  material  are  added  in,  is  shown  separately  on  the 
Sheet,  and  this  true  cost  will  be  the  same  at  all  times, 
whether  the  shop  is  busy  or  slack,  if  the  job  has  been  done  with 
the  same  technical  efficiency  in  both  cases.  If  it  has  not,  then 
thai  fart  ie  visible  on  the  face  of  the  Cost  Sheet,  wholly  divorced 
from  any  complications  due  to  the  amount  of  work  in  the  shops 
on  either  occasion. 


CHAPTER  XX 

COSTING  ON  METHOD  C  (DETERMINING  THE  MACHINE 

RATE) 

It  will,  of  course,  be  understood  at  the  outset,  from  what  has 
been  said  in  previous  chapters,  that  before  considering  the  dis- 
tribution of  burden  within  any  department,  a  thorough  and 
rigorous  departmentalization  of  all  factory  expense,  and  its  entire 
separation  from  selling  expense,  and  certain  other  expenses  such 
as  legal  expenses,  that  come  out  of  profit  and  cannot  be  charged 
to  customers  by  way  of  cost,  must  be  made. 

In  the  present  chapter  it  will  be  assumed,  therefore,  that 
such  departmentalization  has  been  carried  out,  and  that  the 
various  items  of  expense  chargeable  against  the  factory  are  col- 
lected by  means  of  a  Standing  Order  scheme  on  the  lines  sug- 
gested by  Fig.  56.  This  being  the  case,  two  kinds  of  expense  have 
to  be  considered,  namely,  that  chargeable  against  the  depart- 
ment itself,  such  as  the  depreciation,  repairs,  etc.  of  its  own 
building;  the  salaries  of  the  employees  of  all  kinds  within  the 
department,  the  depreciation,  repairs,  etc.  of  its  own  productive 
machines  or  production  centers,  and  in  general  all  those  expenses 
which  are  listed  under  productive  department  columns  in  Fig. 
56.  In  addition  to  these  interior  expenses,  we  have  also  to  con- 
sider the  prorating  of  the  various  non-productive  departments 
over  our  productive  department,  and  the  way  in  which  such 
prorated  expense  must  be  charged  against  the  production 
factors  of  the  department. 

Figure  98  (p.  366)  shows,  in  the  upper  portion,  the  main 
elements  which  are  collected  into  departmental  production 
factors.  These  are  only  suggestions,  inasmuch  as  each  plant 
will  have  individual  items  of  expense,  either  additional  to  or 
replacing  those  shown.  Individual  plants  will  also  have,  in 
some  cases,  to  provide  for  additional  production  factors,  as,  for 
example,  when  certain  machines  in  the  department  are  driven 
by  hydraulic  power  or  compressed-air  power,  or  when  a  tool- 
room service  is  maintained  for  the  use  of  the  department.     In 

355 


356      MANUFACTURING  COSTS  AND  ACCOUNTS 

the  latter  case  not  merely  the  cost  of  the  service  itself,  such  as  space 
charge  for  the  room  occupied,  wages  of  attendants  and  messengers, 
etc.,  but  also  depreciation  and  other  charges  for  the  use  of  the 
tools  will  have  to  be  allotted  to  the  machines  making  use  of  each 
chtss  of  tool.  Thus,  for  example,  if  we  have  among  our  machines 
some  large  boring  lathes,  the  depreciation,  maintenance,  etc. 
of  the  boring  bars  used  by  them  will  have  to  be  made  part  of  a 
special  tool  factor,  and  a  charge  included  in  the  machine  rate  of 
each  of  the  boring  machines  to  take  care  of  such  items  of  expense. 

Referring  to  Fig.  98,  it  will  be  seen  that  the  first  step  is  to 
assemble  in  great  detail  every  item  of  expense  chargeable  against 
each  of  the  factors.  This  expense  must  be  that  incurred,  as 
shown  by  the  past  records  of  the  firm,  when  the  department  is 
working  full  time.  Of  course,  a  number  of  the  items  are  annual, 
and  quite  irrespective  of  the  number  of  hours  the  department 
i-  working.  Depreciation,  rent,  taxes,  insurance,  interest  (if 
charged),  salaried  men,  and  so  forth,  are  not  affected  by  working 
hours  within  limits,  but  others,  such  as  the  charge  for  power  made 
to  the  depart  inent ,  and  some  floating  labor,  will  be  higher  when  the 
shop  is  full  of  work  than  when  it  is  not. 

Further,  these  expenses  must  be  annual  figures.  They  must 
represent  the  whole  of  the  charges  for  one  year,  since  items  like 
heating  and  lighting  at  any  rate  will  vary  in  amount  between 
one  part  of  the  year  and  another.  A  selected  month  will, 
therefore,  not  meet  the  case. 

When  all  the  expense  items  have  been  collected  in  groups, 
corresponding  to  production  factors,  then  the  distribution  of 
each  factor  to  individual  machines  or  production  centers' may  be 
considered.  Each  individual  machine,  as  shown  in  Fig.  98,  will 
also  have  certain  individual  items  of  its  own  to  be  taken  into 
account.  Depreciation,  interest  (if  charged)  and  insurance  on 
the  capita]  value  of  the  machine,  the  annual  cost  of  its  repair  and 
maintenance,  the  annual  cost  of  cleaning  it,  and  of  oil,  waste  and 
similar  supplies  musl  be  carefully  worked  out.  These  items  form 
the  individual  factor  of  the  production  center,  and,  therefore,  are 
pari  of  the  machine  rate.  The  way  in  which  the  production 
center's  share  of  the  service  represented  by  each  of  the  other 
factors,  when  worked  out,  is  entered  against  the  machine  as  part 
of  the  machine  rate,  will  he  understood  from  the  figure.  Each 
factor  i-  worked  out  to  a  figure  representing  its  own  share  of  the 
hourly  machine  rate,  and  this  is  done  with  considerable  accuracy. 


COSTING  ON  METHOD  C 


357 


That  is  to  say  that  if  the  space  factor  for  a  given  machine  is 
found  to  be  $63  per  annum,  and  the  working  hours  are  2,500  per 
annum,  then  the  exact  factor  hour  rate  is  $0.0252.  This  figure  will 
be  recorded  against  the  machine,  for  a  control  purpose  that  will 
be  hereafter  described.  Otherwise,  the  addition  of  all  the  annual 
factors,  divided  by  the  working  hours  per  year  give  the  hourly 
rate  for  that  machine. 

We  may  now  consider,  briefly,  the  collection  of  data  for  each 
separate  factor,  and  the  basis  on  which,  in  each  case,  a  dis- 
tribution between  machines  is  effected. 

Space  Factor. — Figure  99  represents  a  schedule  used  for 
preparation  of  the  space  factor  distribution.     In  this,  as  in  all 


Description 

of 
Prod.  Center 

d 

u 
U 

0 
Li 

Working  Area 

Sq.  Ft. 

O 

u 
a 

bo 
3 

V 

to 

u 

3      •& 

a    W 

B        0) 

<    3 

p. 
w 

bo 

u 

CJ 

—    & 

el     O 

c      " 

c    B 

<  f 

.bo 

1 

c 

c 

pel 
_^ 

3 
O 

H 

201 

1 

202 

1 

203 

1 

204 

1 

205 

2 

206 

1 

207 

1 

208 

2 

_^_ . — _ 

222 

2 

223 

1 

224 

3 

225 

1 

Total  Charge 
Against   Dept. 

50 

Fig.  99. — Schedule  for  distributing  building  or  space  cost  to  production 

centers. 


subsequent  factor  schedules,  columns  are  provided  for  a  list 
of  machines,  giving  brief  description  and  number  of  each.  The 
basis  on  which  space  cost  is  distributed  to  machines  is  that  of 
the  working  area  occupied  by  each.     Consequently  the  working 


358      MANUFACTURING  COSTS  AND  ACCOUNTS 

areas,  that  is  the  space  occupied  by  the  machine  itself,  plus 
sufficient  free  space  around  it  to  permit  handling  of  work,  will 
Leasured  up,  and  entered  opposite  each  machine.  In  some 
space  may  be  occupied  in  a  shop  by  enclosures  belonging 
to  other  fact < us,  as,  for  example,  a  sub-stores  or  a  time  office. 
In  such  cases  the  item  in  question  must  he  listed,  with  the  area, 
it  occupies,  and  when  the;  value  of  the  space  has  been  deter- 
mined, it  must  be  charged  up  to  the  factor  concerned.  Thus  in 
Fig.  (.)S  charges  for  space  factor  are  suggested  against  each  of 
the  other  factors.  But  unless  the  services  represented  by  such 
factors  occupy  space  in  the  department,  being  considered  such  as 
office  room  or  store  room,  this  item  will  not  materialize. 

The  item  of  lighting  may  in  some  cases  require  a  separate 
treatment.  Where  overhead  lighting  is  in  use,  then  obviously 
each  machine  benefits  in  proportion  to  the  area  it  occupies,  but 
in  shops  where  the  exigencies  of  production  demand  separate 
lighting  then  the  share  taken  by  each  machine  must,  so  to  speak, 
lie  weighted,  so  that  some  machines  get  more  lighting  charge 
than  others.  This  may  be  done  by  considering  the  share  of 
each  machine  in  the  general  lighting  as  1,  and  then  adding 
"votes"  to  such  machines  as  take  individual  lighting,  in  pro- 
portion to  the  number  and  size  of  the  lights  used  by  them.  Then 
when  all  the  "votes"  are  totalled  (as  in  column  "Lighting  call" 
Fig.  99)  the  total  lighting  charge  is  divided  by  this  figure,  and  the 
value  of  1  vote  found.  This  value  is,  of  course,  multiplied 
by  the  number  of  votes  allotted  to  each  machine,  and  forms  the 
lighting  charge  tor  that  machine.  This  device  will  rarely  be 
necessary.  Modern  systems  of  lighting  diffuse  illumination 
floor  area  in  smh  a  way  that  individual  machine  lights  are 
unnecessary  in  mosl  ca 

If  no  separate  calculation  for  lighting  is  made,  then  the  two 
columns  headed  '  Lighting  call"  and  "Annual  lighting  charge" 
will  be  omitted  from  the  schedule.  The  annual  expenditure 
on  the  class  of  expense  represented  by  the  space  factor  is  simply 
totalled,  and  this  t < > t .- 1 1  divided  by  the  total  working  area  of  all 
machines,  to  find  the  space  charge  per  square  foot,  per  year. 

Multiplying  this  unit  charge  by  the  working  area  of  each 
machine  gives  I  he  annual  charge  for  space  for  each  machine. 
This  figure  i-  entered  in  column  headed  "Annual  Space  Charge" 
if  lighting  i-  reckoned  separately,  or  in  the  column  headed 
"Annual  Rate"  if  not.      Division  of  this  figure  by  the  working 


COSTING  ON  METHOD  C  359 

hours  per  year  gives  the  hourly  charge  against  cadi  machine  for 
the  space  factor. 

When  interest  is  included  in  cost,  and  the  land  on  which  the 
factory  is  built  is  the  property  of  the  firm,  then  a  Land  Schedule 
must  be  prepared,  tabulating  the  interest  charge  per  square  foot, 
and  allotting  the  proper  amount  to  each  department:  this 
amount  will  then  be  included  in  the  depreciation  item  of  the 
space  charge.1 

Power  Factor. — Figure  100  shows  the  schedule  for  distributing 
power  factor  to  individual  machines  or  production  centers. 
The  power  factor  has  commonly  two  divisions,  charges  incident 
on  the  presence  within  the  shop  of  shafting,  pulleys,  belts, 
motors,  switchboards,  etc.,  and  the  charge  for  power  supplied 
by  the  power  department,  whether  mechanically  or  electrically 
transmitted. 

Expenditure  on  the  former  division  is  collected  by  means  of 
the  Standing  Orders  of  the  50,  51,  53,  59  groups  (see  Fig.  56) 
for  each  department  separately.  Expenditure  on  the  power 
plant  itself  is  collected  by  means  of  the  Standing  Orders  as  listed 
under  department  4,  power  department,  (Fig.  59).  When  all  the 
expenses  of  generating  power  have  been  collected,  it  is  prorated 
over  the  departments  taking  power,  on  a  horsepower  basis. 

Referring  to  Fig.  100,  the  way  in  which  each  of  the  two 
divisions  of  power  factor  is  assessed  against  machines  will  be 
readily  understood.  Against  each  machine  or  production  center 
the  average  horsepower  taken  by  the  machine  is  set  down. 
In  the  next  column  the  average  cost  of  the  horsepower-hour,  as 
indicated  by  the  prorating  above,  is  multiplied  by  the  horsepower 
taken,  and  entered  against  each  machine.  This  horsepower 
cost  figure  will  be  that  obtaining  under  the  most  favorable 
conditions  of  production,  when  all  the  departments  are  running 
full  time.  In  the  next  column  the  interior  expense  of  the 
department  on  its  transmission  equipment  is  assessed  against 
each  machine.  Finally,  each  line  is  cross-totalled,  thus  giving 
the  total  annual  power  factor  charge  against  each  machine. 
Dividing  this  by  the  normal  hours  in  the  working  year  gives 
the  hourly  charge  for  the  power  factor.  This  is  expressed 
to  four  places  of  cents. 

In    some    cases,    however,    a   somewhat    different    procedure 

^ee  the  author's  "Production  Factors"  for  a  full  discussion  of  the  various 
conditions  under  which  land  factor  is  chargeable. 


360      MANUFACTURING  COSTS  AND  ACCOUNTS 

is  preferred.  The  sphere  of  the  power  department  is  con- 
sidered to  include  delivery  of  the  power  to  the  machine  itself. 
In  that  case  whatever  devices  are  used  within  the  shop,  such  as 
main  shafts,  belts,  motors,  switchboards,  etc.  are  considered  to 
be  the  property  of  the  power  department,  and  consequently 
the  costs  of  the  Standing  Orders  of  the  50,  51,  53,  59  groups  are 


Description 

of 
Prod.  Ctr. 

d 

u 

0 

P-, 

c 

M     3 

r   ° 

h  x 

X 

Annual 
Power  Charge 

Charge  for 

Power  Eq'pt. 

in  Shop 

u 

"rt 

3 
C 

a 
< 

u 

3 
O 

X 

201 

1 

202 

v2 

203 

n 

204 

i 

205 

7 

206 

1 

207 

1 

208 

3 

221 

1 

222 

2 

223 

1 

224 

H 

225 

1 

Total  Charge 
against  Dept. 

J  IG.    100.    -Schedule   fur   distributing   power   cost   to   production   centers. 

charged  nol  againsl  the  -hop  luit  against  the  power  department, 
and  merged  in  the  general  total  of  power  costs.  By  this  means 
there  is  only  one  elemenl  in  the  department  power  factor,  namely 
the  cost  of  the  horsepower-hour,  all  power  costs  of  whatever 
kind  being  included  in  this.  Space  docs  not  permit  of  dis- 
cussing the  circumstances  under  which  such  a  disposition  of 
the  power  service  charges  is  justified,  but  under  certain  cir- 
cumstances  the  arrangemenl  is  preferable.     The  arrangement  is, 


COSTING  ON  METHOD  C  361 

of  course,  equivalent  to  taking  current  from  the  mains,  the  supply 
company  furnishing  the  motors  and  other  shop  equipment 
necessary,  without  charge  to  the  consumer. 

Stores-transport  Factor. — The  items  composing  this  factor 
will  vary  greatly  in  different  plants.  In  some  it  will  be  a  very 
important  factor,  in  others  it  will  be  of  very  small  dimensions. 
It  includes,  as  in  the  case  of  the  power  factor,  one  division 
arising  out  of  expenses  within  the  department,  and  also  a  division 
representing  the  prorated  share  of  the  general  stores  depart- 
ment, and  it  may  be  also,  outside  crane  and  yard  service  in  large 
plants. 

The  former  division  of  expense  will  consist  of  the  expenditure 
on  transporting  and  moving  material,  including  work  in  process, 
in  and  about  the  department.  It  may  thus  include  charges  for 
crane  equipment,  conveyors,  etc.,  wages  of  crane  men  and 
movemen,  depreciation  on  and  cost  of  repairs  to  the  equipment, 
etc.  These  items  are  collected  within  each  department  by  the 
Standing  Orders  of  the  20  to  29  groups  (see  Fig.  59). 

The  other  division  of  the  stores-transport  factor,  namely  the 
cost  of  the  stores  department,  and  other  agencies  outside  the 
department,  will  be  collected  by  the  Standing  Orders  listed  under 
the  column  devoted  to  department  3.  The  items  here  will  re- 
quire expanding  in  many  cases,  as  for  instance  to  include  yard 
service.  When  collected,  such  items  are  prorated  to  the  various 
departments  on  a  basis  presently  to  be  discussed. 

Within  the  department,  if  the  industry  is  one  using  heavy 
cranes  or  travelers,  it  is  necessary  to  map  out  the  floor  area  of  the 
shop  into  "  crane  areas."  This  is  effected  by  filling  out  a  blank 
like  Fig.  101,  in  which  the  annual  expenses  for  each  crane  area 
or  "bay"  as  assessed  separately,  in  order  that  they  may  be 
divided  among  the  machines  served  by  the-  crane.  Fig.  102 
shows  how  this  is  done.  Columns  are  provided  for  each  crane 
area  or  bay,  and  a  mark  is  placed  in  the  column  opposite  the 
machines  that  are  situated  in  that  bay.  Then  the  total  cost  of 
the  crane  service  in  the  bay  is  prorated  over  the  marked  machines 
on  a  basis  of  the  service  judged  rendered  to  each,  having  regard 
to  the  kind  of  work  done  at  each  machine.  It  does  not  follow, 
of  course,  that  each  machine  receives  an  equal  charge.  It  might 
happen  that  some  machines  in  a  bay  made  no  use  whatever  of  the 
crane  facilities.     Charges  will  be  adjusted  accordingly. 

In  the  next  column  of  the  distribution  schedule,  Fig.   102, 


362       1/.1A  UFACTURING  COSTS  AND  ACCOUNTS 


STORES  TRANSPORT  FACTOR 
Building  Nn                               f)pnt- 

IT1.M 

Total 

Bay 
No.l 

Bay 

No.2 

Bay 
No.  3 

Crane  No. 

Span 

Capacity 

Cost 

Area 

STATEMENT  OF  ANNUAL  EXPENSE 

Depreciation 

Insurance 

Interest 

Repairs 

Current 

Cranemen 

Other  Labor 

Supplies 

Total 



Ik;,  loi  — Analysis  of  crane  costs  per  bay 


COSTING  ON  METHOD  C 


363 


Description 

of 
Prod.  Center 

o 
U 

T3 
0 
I* 

u    6 
O 

>> 

B     i 
rt    /5 

U 

u     O 

U 

V**    CJ 

o  ^ 

u       Eh 

rt     & 

^     CO 

"rt 

3 
C 
C 

< 

rt 

3 

o 

201 

* 

202 

* 

203 

* 

204 

* 

205 

- 

206 

.': 

207 

ft 

208 

209 

ft 

210 

* 

211 

* 

212 

* 

213 

ft 

214 

$ 

215 

* 

216 

ft 

217 

ft 

218 

ft 

219 

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221 

:: 

222 

ft 

Total  Charge 
against  Dept. 

Fia.  102. — Schedule  for  distributing  stores-transport   cost  to   production 

centers. 


364      MANUFACTURING  COSTS  AND  ACCOUNTS 

space  is  provided  for  assessing  the  charge  to  each  machine  for  the 
corps  of  movemen  and  handlers  employed  in  the  shop  when 
it  is  working  full  time.  This  will  be  assessed  in  the  same  way  as 
crane  service,  namely,  after  consideration  of  the  kind  of  work  done 
by  each  machine  and  its  call  on  the  service  of  the  movemen. 

A  column  is  also  provided  for  distributing  the  total  of  the 
prorated  charge  for  stores  department,  to  the  machines.  In  the 
first  place,  this  prorating  will  have  been  made  on  the  basis  of  the 
kind  of  work  done  in  each  department,  and  its  relation  to  the 
outside  service.  It  will  be  proportional  to  the  size  of  the  depart- 
ment, of  course,  and  also  to  the  nature  of  the  work  carried  on  in 
it,  and  the  call  of  this  latter  on  the  services  of  the  stores  depart- 
ment. No  general  rule  can  be  laid  down,  as  decision  depends 
on  a  close  and  careful  review  of  the  circumstances  in  each  case. 

Naturally,  the  considerations  that  have  been  taken  into 
account  in  prorating  a  certain  sum  against  any  department  will 
follow  the  amount  into  the  shop  and  be  used  in  arranging  the  dis- 
tribution of  the  amount  to  each  individual  production  center. 
A  very  close  and  satisfactory  distribution  can  be  attained  with 
a  little  analysis  and  judgment.  Either  the  distribution  will  be 
a  uniform  one  or  it  will  not.  In  the  latter  case,  there  will  be 
reasons  why  it  should  not,  and  the  giving  of  relative  weight  to 
each  of  these  reasons  is  a  matter  of  detail  offering  no  insuperable 
difficulty. 

When  all  these  columns  (Fig.  102)  have  thus  been  filled  out, 
cross-total-  are  made  as  in  the  former  schedules,  giving  annual 
and  hourly  charge  for  the  stores-transport  factor  against  each 
machine  or  production  center. 

Supervision  Factor. — Figure  103  shows  the  schedule  for  dis- 
tributing  the  cost  of  supervision  to  production  centers.  Again, 
there  will  be  certain  items  arising  within  the  department,  and 
some  outside.  The  former  arc  represented  by  Standing  Orders 
of  the  36  group  (see  Fig.  56);  the  latter  by  the  prorating  of  the 
total  cosl  of  the  departmenl  of  superintendence  and  production 
over  the  various  productive  departments.  In  this  latter  depart- 
ment i  he  factory  share  of  the  salaries  of  the  higher  officials  is  also 
included. 

Within  the  departmenl  it  may  happen  that  particular  groups 
of  machines  are  under  the  care  of  sub-foremen  or  "gang  bosses." 
Columns  are,  therefore,  provided  in  the  supervision  schedule 
for  each  such  oflicial,  and  the  machines  under  his  care  are  marked 


COSTING  ON  METHOD  C 


365 


Description 

of 
Prod.  Center 

6 

u 

o 
t- 

a 

vl 

°    J 

fa    Z 

3 
CO 

d 
3 

E 

1)      rsi 

t-          • 
O        O 

^    2 

x> 

3 

CO 

c 
S     c 

i-i      ■*-» 
O     .2 

fa     23 

r  < 
5  ^ 

o 

C3 

rt   _ 

CO     c 

u 

0 

3 

a 

a 
< 

i) 

3 
O 

201 

202 

203 

* 

204 

205 

* 

206 

* 

207 

208 

209 

* 

210 

211 

* 

212 

213 

* 

214 

* 

215 

216 

* 

217 

218 

* 

219 

* 

220 

221 

222 

Total  Charge 
against  Dept. 

Fig.  103. — Schedule  for  distributing   supervision   to   production   centers. 


366      MANUFACTURING  COSTS  AND  ACCOUNTS 

as  in  the  case  of  crane  bays  (see  Fig.  103).  The  salaries  of  the 
sub-foremen  arc  then  divided  among  the  machines  under  his 
special  care.  The  next  column  collects  the  salaries  of  the 
general  department  foreman  and  his  assistants,  and  this  total  is 
distributed  over  machines  cither  equally  or,  if  circumstances 
warrant  it,  on  a  basis  of  "weighting"  some  machines  more  than 
others. 

Finally,  a  column  is  provided  to  collect  the  department's 
share  of  the  prorated  expense  of  department  1  (see  Fig.  56). 
This  department  assembles  the  cost  of  superintendent's  office, 
and  of  the  production  staff,  tracers,  etc.,  and  also  the  factory 
share  of  the  higher  officials'  salaries.  When  all  the  cost  of  de- 
partment 1  has  been  assembled,  it  is  prorated  over  productive 
departments  in  general  proportion  to  their  productive  pay-roll, 
though  in  this  case  also  "weighting"  is  permissible,  if  it  is  judged 
that  certain  departments  take  more  than  the  average  share  of 
supervision  and  attention  from  the  superintendent's  and 
product  ion  staffs. 

Distribution  within  the  department  is  usually  on  a  basis  of 
equality  as  between  machines,  but  the  same  considerations  as  to 
weighting  will  apply  in  this  case  also  whenever  there  is  justifica- 
tion for  it. 

When  all  these  items  have  been  assessed  against  machines 
-totalling  gives,  as  before,  the  annual  and  hourly  charge 
against  each  production  center  for  the  supervision  factor. 

Organization  Factor. — Figure  104  shows  the  schedule  for  dis- 
tributing organization  factor  expense  to  production  centers. 
Usually  there  will  not  be  any  interior  organization  expense, 
within  :i  department,  since  any  cost  or  time  clerks  stationed  there 
may  1m-  considered  as  part  of  department  2,  and  any  clerks  as 
part  of  the  supervision  charge  (when  they  are  merely  clerical 
help  for  the  foreman).  In  some  plants,  however,  the  40  to  49 
series  may  require  applying  to  one  or  more  departments,  but 
tin-  will  iii  general  only  apply  to  very  large  plaids. 

Excepl  in  tli'-  case  just  mentioned,  all  organization  expense 
comee  from  outside,  and  is  represented  by  the  prorating  of  depart- 
ment '-'  (see  Fig.  56).  This  prorating  is  made  on  a  basis  of  the 
relative  productive  pay-roll  of  the  department,  and  within  the 
departmenl  may  be  made  on  an  equal  basis  as  between  machines, 
unless  there  is  reason  to  the  contrary,  when  the  share  of  certain 
machines  may  be  weighted.     The  guiding  principle  will  be  the 


-  $  Depreciation  „  '^  ^ 

-  $  Insurance  jf 5  g 

—Interest  ■++,£;  K  - 

—Repairs  &  Maintenance 
— Lightning 
—Heating 

—Cleaning  &  Sundry  Labor 
Sundry  Supplies 


pace  Factor  (if  any) 

Depreciation  Shop  Equip 

-Insurance  •• 

-Interest  •■ 

-Repairs  &  M'tce 
-Cleaning  &  Oiling     ■■ 
-Sundry  Labor 

Sundry  Supplies 

■Current  or  Power  Charge 


Space  Factor  (if  any) 

-Depreciation 

-Insurance 

-Interest 

-Wages,  Cranetnen  &c 

Repairs  &  M'tce 

Cleaning  &  Oiling 

-Sundry  Supplies 

-Share  of  Stores  Dept 


Space  Factor  (if  any) 

—Foremen  &  Assistants 
-Sub  foremen  or  Bosses 

Deprec'n  on  Equipment 

—Insurance  ■• 

-Interest 

Repairs  &c  .. 

Share  of  Supt  &  Prod  Staff 

Share  of  Admin  Salaries 


-Space  Factor  (if  any) 
-Deprec'n.on  Equipment 
-Insurance  »■ 

-Interest 

Salaries  in  this  Dept. 

Books,  Blanks  ■•     •• 

Sundry  Supplies 

Share  of  Gen'l  Org'n 


Individual  Machine 


!»:; 


o 


True  Cost  of  Job        Cost  Including  Waste 


Cost  of 

Manufacturing 

Capacity 


Utilized 
Work 


Time 


True  Cost 
of  Job 


Inclusive 
Shop  Cost 


Selling  Expense 


FIG  98       SHOWING   COMPOSITION  OF  MACHINE  RATES 
AND  ALSO  THE  RELATION  OF  UTILIZED  AND  WASTED    CAPACITY 
TO  COST  AND  SALE  PRICE 


Note 
Profit  made  pays 
for  the  Item  of  Wasted 
Shop  Capacity  Included 
in  Cost 

But  Sale  Price 
could  be  that  much 
less  and  still  leave 
the  same  Profit  on  th 
actual  Process  Cost 
of  Production 
This  would  be  a 
Hard  Times  Pric 


c 


COSTING  ON  METHOD  C 


367 


degree  to  which  the  nature  of  the  work  gives  rise  to  detailed  n  scon  I  - 
ing,  etc.,  so  that  more  expense  of  the  kind  arises  from  the  work  of 
one  machine  or  production  center  than  of  another. 

The  usual  cross-totallings,  and  reduction  to  hourly  value  are 
made  as  in  the  case  of  other  schedules. 


Description 

of 
Prod.  Ctr 

o 

:z 

■<-» 

u 

o 

U| 

0. 

Organization 

Expense 

in  this 

Dept 

Share  of 

General 

Factory 

Organization 

U 

3 

3 
C 

c 

< 

n 

3 
O 

X 

201 

202 

203 

204 

205 

219 

220 

221 

222 

223 

Total  Charge 
against  Dept. 

Fig.  104. — Schedule  for  distributing  organization  expense  to  production 

centers. 


Individual  Machine  Factor. — Each  machine  or  production 
center  has  an  individual  factor,  representing  the  charges  and 
expenses  arising  out  of  its  depreciation,  repair,  etc.  Fig.  105 
shows  the  schedule  for  determining  these  individual  factors.  The 
expenses  to  be  distributed  are  those  collected  by  the  60  to  63 
group  of  Standing  Orders  (see  Fig.  56).  They  are  wholly 
individual,  not  merely  to  the  department,  but  to  each  production 
center. 

The  first  item  is  that  of  depreciation.  Columns  are  provided 
for  the  cost  of  the  machine,  the  depreciation  rate  pertaining  to 


368      U.l  VUFACTURING  COSTS  AND  ACCOUNTS 

it,  and  for  the  resulting  annual  sum  chargeable  for  depreciation. 
These  particulars  will  be  in  agreement  with  the  Depreciation 
Schedule  (Chap.  VII,  Part  II).  A  similar  column  is  provided  for 
insurance,  and  for  interest  when  this  is  charged  into  Cost  (see 
( 'hap.  XXIV,  Part  II).  The  next  two  columns  are  used  for  plac- 
ing against  each  production  center  an  estimate  of  the  average 
amount  of  repairs,  and  of  supplies  such  as  oil,  waste,  etc.  likely 


Description 

of 
Prod.  Center 

o 

•z, 

u 

6 

-a 
o 

o 
O 

01 

u 

a. 

■j 
Q 

c 

.2 

2  73 

c  "5 

5    u 

C      u 

<    §• 
Q 

V 

o 

c 

C4 

u 

3 

a 

u 

O 

c 

n 

Li 
'3 

a 

0> 

K 

■a 

c 

3 
W 

« 

73 

3 
C 
C 
< 

31 

rt 
M 
_^ 
S 

3 
O 

201 

2'/2 

202 

3 

203 

4 

204 

2 

205 

2V2 

20G 

3 

218 

218 

2 

219 

4 

220 

3 

221 

2H 

222 

2 

Total  Charge 
Against  Dept. 

I  i'..    105. — Schedules  fur  determining  individual  production  center  charges. 


to  be  incurred   during  a  normal  year.     If  good  records  exist 
these  figures  can  be  based  on  past  experience,  but  if  not  they  must 
■  ry  carefully  worked  out. 

totalling  of  the  items  gives,  as  before,  the  total  charge 
against  each  machine  for  the  individual  machine  factor. 

Hourly  Machine  Rate. — If  there  are  no  special  factors  to  be 
determined,  as  for  instance  a  hydraulic  power,  or  compressed- 
air  factor,  the  nexl  step  is  to  tabulate  all  the  charges  which  have 
separately  determined  by  means  of  the  foregoing  schedules, 


COSTING  ON  METHOD  C 


369 


a^Bji  Action 

1 

sjoiobjJ 
l^nuuv  IB^ox 

* 

joiob^j 
jBnpiAipuj 

JOpBJ 

uoi^bziubSjo 

JO^OBJ 

uoisiAjadng 

JtOrpB^ 

•^dj,    saao^s 

jo^db^  aaMoj 

| 

jo^db^  aoBdg 

j 

•on  *a^O  MJ 

o 
o 

CM 

o 

CM 

o 

CM 

CO 

o 

CM 

o 

CM 

o 

CM 

O 
CM 

© 
CM 

0)   ** 

to  o. 

•a^O  -poaj 

JO 

uopduossQ 

( 

c3 

> 

- 

ii 

o 

d 

w 

S-l 

a) 

ai 

■M 

3 

T) 

d 

o    o 

o  2 

I  - 


P»H      10 


21 


370      MANUFACTURING  COSTS  AND  ACCOUNTS 

so  thai  they  may  be  combined  into  a  single  amount,  expressible 

as  an  hourly  rate  for  the  use  of  the  machine. 

Figure  106  shows  the  Machine  Kate  Schedule.  Its  use 
will  be  evident  from  an  inspection  of  the  ruling.  The  amounts 
(the  annual  amounts)  shown  on  each  factor  schedule  against, 
say,  machine  200  are  transferred  to  the  proper  columns  in  this 
schedule,  and  when  cross-totalled  give  a  grand  total  of  annual 
expense  chargeable  against  200  for  all  factors.  This  total  divided 
by  the  working  hours  per  year,  will  give  the  hourly  machine 
rate. 

Special  Machine  Rates. — From  what  has  been  explained 
as  to  the  manner  in  which  machine  rates  are  built  up  from  Stand- 
ing Order  elements,  it  will  be  readily  understood  that  machine 
rates  can  be  constructed  to  meet  all  circumstances  and  several 
special  wants.  Thus  they  can  be  constructed  for  plants  working 
double  or  treble  shifts — such  rates  being,  of  course,  very  different 
from  ordinary  rates  and  not  in  any  sense  multiples  of  the 
latter.  They  can  be  arranged  to  take  care  of  regular  but  inter- 
mittent periods  of  overtime,  and  to  meet  the  case  of  machines 
which  arc  used  only  a  part  of  their  time.  Further,  for  estimating 
purposes,  machine  rates  may  be  made  up  which  eliminate  the 
inclusion  of  interest  (as  described  here  interest  has  been  assumed 
to  be  omitted,  but  it  could  easily  have  been  included)  and  even 
of  depreciation.  The  use  of  these  latter  varieties  is  for  what 
may  be  called  "hard  luck"  estimating,  when  the  rock  bottom 
price  based  on  actual  out  of  pocket  expenses  is  required  to  be 
found.  Though  these  latter  varieties  are  mentioned,  it  must 
not  be  supposed  that  their  use  is  to  be  encouraged. 


CHAPTER  XXI 
COSTING  ON  METHOD  C   (CONTROL  OF  FACTORS) 

The  accuracy  of  machine  rate  determination  depends  on 
the  way  in  which  a  large  number  of  small  expenses  have  been 
carefully  analyzed  and  allotted,  so  that  the  resulting  errors  will 
be  very  small  individually,  and  the  final  result  will,  therefore, 
be  the  closest  approximation  to  accuracy  possible. 

But  it  will  be  obvious  that,  after  all,  the  machine  rate  is  a 
standardization  of  factor  cost,  and  it  is,  therefore,  necessary  to 
set  up  mechanism  by  which  its  accuracy  may  be  tested  from 
time  to  time,  under  varying  conditions  of  the  business.  The 
machine  rate  is,  in  fact,  a  measure  of  cost,  but  everything  de- 
pends on  whether,  so  to  speak,  this  measure  has  been  correctly 
graduated. 

It  will  be  remembered  that  each  of  the  factor  schedules 
described  in  the  last  chapter  was  arranged  with  a  column  to 
contain  the  hourly  rate  representing  the  machine  charge  jor  one 
factor.  All  the  factors  were  combined  to  make  the  hourly  rate 
for  the  use  of  the  machine.  It  follows,  therefore,  that  it  would 
be  possible  to  decompose  any  amount  charged  through  machine 
rates  so  that  the  amount  could  be  split  up  into  smaller  amounts 
each  representing  a  charge  for  one  factor. 

Though  very  simple,  this  is  too  laborious  an  undertaking 
to  perform  as  part  of  the  costing  operations  every  month,  nor 
is  it  necessary.  It  will  suffice  if  done  occasionally,  now  for  one 
factor  and  now  for  another,  and  at  still  longer  intervals  for  all 
factors  together. 

The  blank,  Fig.  107,  will  be  found  useful  for  this  purpose. 
The  machine  numbers  are  listed  in  the  first  column,  and  their 
rates  in  the  second.  The  third  column  contains  the  total  hours 
worked  by  the  machine,  and  the  fourth  the  total  earnings  of  the 
machine  for  the  month  under  examination.  The  remaining 
columns  are  six  in  number,  each  pertaining  to  one  factor,  and 
are  double — the  left-hand  portion  containing  the  machine 
factor  rates  taken  from  the  factor  schedules,  and  the  right- 

371 


372      MANUFAi  TURING  COSTS  AND  ACCOUNTS 


m 
bO 
C 

'c 

u 

a 

u 
o 

o 

o 
c 

to 

to 

c 

£ 

W 

O 

c 
IS 

o 
08 

0 

>*) 
'35 
j>» 

"3 

c 

< 

3  fa 

>   J 

■9  a 

< 

■j 
*-< 
cd 

- 

j 

"n 

a 

rt 
W 
u 

o 

1 
< 

( 

c 
.2 

'm 

'> 
b 

ft 

D 
■j. 

< 

6    Qi 

3  c 
w  2 

I 

'' 

b 

eg 

o 

s 

3 

0 

o 

a 
ft 

4-» 

S 

. 

Total 

of 
Earning 

for  Month 

P*V°M  '"H 

■  joniv* 

1 

°"!'PCK 

h 

hand  portion  the  amount 
which  results  from  multiply- 
ing the  hours  worked  by  the 
machine  by  this  factor  rate. 
The  blank  may  be  blue- 
printed (blue  lines  on  white 
ground),  the  machine  num- 
bers, machine  rates,  and 
factor  rates  being  written  in 
on  the  negative  so  as  to  ap- 
pear on  all  copies.  The  fill- 
ing out  of  the  blank  is  then 
confined  to  inserting  the 
hours  wrorked,  total  earnings 
and  making  the  computa- 
tions in  the  factor  columns. 
A  Munroe  machine  will  be 
found  useful  for  this  work,  as 
the  hours  being  set  on  the 
machine,  the  alterations 
necessary  in  the  multiplier 
for  each  factor  rate  are  made 
by  turning  the  handle  back 
and  forth  till  the  new  multi- 
plier is  rung  up  in  the  dials. 
If  only  one  factor  is  being 
worked  out,  the  factor  hour 
rate  is  set  on  the  keyboard, 
and  the  hours  worked  figure 
rung  up  on  the  dial.  The 
amount  in  total  earnings  for 
month  column  must,  of 
course,  agree  with  the  amount 
as  shown  in  Manufacturing 
Journal  for  that  month. 

Having  wrorked  out  the 
earnings  for  one  or  all  factors 
we  may  now  compare  the 
figures  with  the  actual  debits 
t<>  the  Standing  Orders  which 
enter  into  any  one  factor.    In 


COSTING  ON  METHOD  C  373 

all  cases  the  amount  in  the  factor  column  must  be  equal  to  or  less 
than  the  actual  debits  per  Standing  Orders.  In  general  it  will 
only  be  equal  when  the  shops  are  working  full  time.  In  all 
other  conditions  it  will  be  less.  How  much  less  will  depend  on 
the  condition  of  activity  of  the  shops. 

In  the  case  of  the  power  factor,  where  power  is  purchased 
from  outside  at  a  flat  rate  and  the  power  factor  charge  has  been 
made  on  the  basis  mentioned  in  the  last  chapter  (where  the  shop 
transmission  equipment  charges  are  assumed  by  the  power 
department,  and  everything  is  based  on  a  single  horsepower- 
hour  rate)  it  is  evident  that  the  decomposition  of  the  machine 
earnings  into  factor  earnings  should  show  a  very  close  corre- 
spondence between  the  amount  distributed  by  machines  and 
the  amount  debited  to  the  department  under  examination. 
If,  on  the  other  hand,  the  factory  maintains  its  own  power 
plant,  the  cost  of  power  actually  consumed  would  be  higher  than 
allowed  for  in  the  power  factor,  and  this  balance  would  properly 
fall  into  supplementary  rate. 

A  factor  which  needs  close  watching  is  the  individual  machine 
factor,  since  the  amount  assigned  for  repairs  to  each  machine 
may  bear  a  high  ratio  to  the  total  factor  charge.  But  in  this 
case,  of  course,  a  mere  monthly  comparison  means  nothing,  since 
the  amount  of  repairs  in  so  short  a  period  may  fluctuate  violently 
as  compared  with  a  similar  period.  The  way  in  which  this  item 
can  be  checked  is  by  keeping  a  record  (through  Standing  Orders) 
of  the  repairs  made  to  each  machine,  and  recording  it  on  the 
record  card  (Fig.  42) .  Machines  that  have  been  under-estimated 
as  to  their  annual  repair  bill,  or  vice  versa,  will  have  their  repair 
allowance  modified  accordingly. 

The  yearly  examination  of  amounts  charged  to  the  various 
factors  through  standing  orders,  and  comparison  with  the  amounts 
assigned  in  making  up  the  factor  schedules,  is  the  true  method 
of  controlling  the  make  up  of  machine  rates.  Whatever  amount 
is  assigned  to  a  schedule  will  be  distributed  by  machine  rates  in 
strict  proportion  to  the  use  made  of  the  machines,  but  if  this 
amount  is  over-  or  under-stated,  as  compared  to  actual  charges, 
it  will  mean  that  supplementary  rate  (which  wipes  up  all 
unabsorbed  charges  at  the  month  end)  will  have  been  too  high, 
or  too  low.  This  is  one  reason  why  supplementary  rate  balances 
should  not  be  charged  direct  to  Profit  and  Loss,  unless  we  are 


:;7-l      MANUFACTURING  COSTS  AND  ACCOUNTS 

quite  certain,  by  experience,  that  the  factor  schedules  were  cor- 
rectly made  up  in  the  first  place. 

Verification  of  factor  schedules  is,  therefore,  the  main  line  of 
control  in  Method  C.  Where  the  shops  are  working  full  time, 
.lie. imposition  into  factors  now  and  then  will  give  a  very  close 
control  of  the  situation,  care  being  taken  to  consider  the  influence 
of  unusually  heavy  repairs  or  of  seasonal  items  like  lighting  and 
heating.  A  little  experience  and  familiarity  with  the  details  in 
practice  will  soon  enable  a  close  grip  on  actuality  to  be  attained. 
It  may  be  remarked  also  that  this  frequent  scrutiny  of  burden 
items  in  all  their  ramifications  is  one  of  the  most  beneficial  things 
for  the  business,  quite  apart  from  its  importance  in  controlling 
the  correctness  of  machine  rates. 

In  examining  the  resulting  figures  of  any  decomposition,  the 
viewpoint  will  be  dependent  on  the  consideration  that  the  factor 
rates  represent  the  department  at  its  maximum  condition  of 
activity  (without  overtime,  unless  that  was  specifically  arranged 
in  fixing  factor  charges).  Now  any  less  degree  of  activity  will  be 
productive  of  idle  lime,  and  consequently  a  lessened  absorption 
of  factor  expense  by  machine  earnings.  It  may  easily  happen 
that,  notwithstanding  the  lessened  activity,  no  economies  in 
Standing  Order  items  have  been  effected.  In  that  case,  there  is 
no  need  to  decompose  the  machine  rate  into  factors,  since  we  can 
compare  the  actual  charges  with  the  factor  schedule  total,  and 
they  will,  of  course,  be  about  the  same. 

Bui  if  the  lessened  activity  has  forced  on  economies  in  Stand- 
ing Order  items,  then  it  is  important  to  observe  that  the  amounts 
In  ing  distributed  by  machine  rates  are  not  more  than  the  new  and 
lessened  total  of  any  factor  debit.  It  general  they  will  be  less, 
because  if  we  face  a  reduction  of  say  75  per  cent,  in  shop  activity 
it  i~  impossible  to  suppose  that  a  75  per  cent,  reduction  of  Stand- 
ing Older  item-  has  been  found  possible.  Therefore,  the  amount 
In  hi  chargi '/  as  supplt  mentary  rate  will  be  the  difference  between  the 
amount  absorbed  by  machine  rates  and  the  lessened  total  of  charges 
for  the  month.  A  specific  instance  may  make  this  proposition 
Bomewhal  clej 

We  v,  ill  auppose  thai  a  ^iven  factor  schedule  was  set  up  with 

:i  total  annual  charge  of  $7,200,  which  would  be  equal  to  an  aver- 

age  "!'  1600  per  month.     When  the  shop  was  working  full  time, 

decomposition  of  the  machine  earnings  would  give  a  total  earn- 

for  thai   factor  of  $600.     This  would  be  obvious  without 


COSTING  ON  METHOD  C  375 

decomposing  the  rate  to  see,  because  we  would  know  it  from  an 
inspection  of  the  factor  schedule  itself.  It  would  simply  be 
one-twelfth  of  the  factor  total  on  the  schedule. 

But  if  we  assume  that  the  shop's  activity  is  reduced  25  per 
cent,  and  that  by  strenuous  exertions  wehave  managed  to  reduce 
Standing  Order  charges  concerned  in  the  factor  by  $100,  this 
would  leave  the  debit  to  the  factor  $500  for  the  month,  Now, 
the  machine  earnings  under  these  circumstances  would  average 
about  25  per  cent,  less  than  normal,  due  to  shutting  down  of 
machines,  and  75  per  cent,  of  the  standard  earnings  would  be 
charged  to  machines  rates,  which  being  decomposed,  would  give 
us  factor  earnings  of  $450.  This  is  still  $50  less  than  the  reduced 
factor  debit,  and  supplementary  rate  would  accordingly  take  up 
$50.  But  if  we  had  not  economized  at  all,  supplementary  rate 
would  then  be  charged  with  the  difference  between  $600  debit 
ot  the  factor,  and  $500  factor  share  of  the  decomposed  machine 
earnings,  or  $100  in  all. 

It  is  practically  impossible  that  economies  can  overtake  the 
lessened  machine  earnings  due  to  idle  machines,  and  this  implies 
that  in  slack  times  the  amounts  distributed  through  machine  rates 
can  never  be  less  than  the  actual  debits  either  to  individual 
factors,  as  shown  by  Burden  Journal,  or  to  Burden  account  as  a 
whole.  What  is  true  of  individual  factors  and  decomposed 
machine  earnings  is  also  true  of  burden  as  a  whole  and  machine 
earnings  as  a  whole. 

The  main  reliance  in  controlling  the  correctness  of  machine 
rates  must  be  placed  on  observing  their  behavior  when  the  shop 
is  running  full  time.  In  this  condition,  supplemenary  rate  should 
approach  very  closely  to  zero,  and  the  actual  debits  to  factors 
as  shown  by  Standing  Order  costs  should  agree  very  closely  with 
the  amounts  set  out  on  the  factor  schedules  and  on  which  the 
factor  charges  to  machines  were  built.  Under  other  conditions, 
the  examinations  to  be  made  from  time  to  time  will  afford  security 
that  burden  is  not  being  over-distributed,  and  a  little  experience 
and  comparison  of  economies  effected,  with  the  amount  of  various 
factors  as  charged  through  machine  rates  when  decomposed,  will 
go  to  show  that  no  item  of  burden  is  being  under-distributed  to 
any  noticeable  extent. 

It  must  be  remembered  that  the  machine  rate  has  a  twofold 
function:  First,  to  distribute  the  department  burden  to  work; 
secondly,  to  distribute  it  in  proportion  as  it  has  been  spent  on 


376      MANUFACTURING.  COSTS  AND  ACCOUNTS 

certain  machines.  These  two  aims  are  distinct.  If  the  determi- 
nation of  rates  has  been  carefully  made,  there  will  be  very  little 
doubt  about  the  successful  performance  of  the  latter  function. 
But  to  insure  that  the  total  burden  (or  the  total  of  each  factor  or 
class  of  burden)  has  been  correctly  stated  to  begin  with  is  a  more 
difficult  matter.  It  is  to  observe  whether  this  is  so  that  all  the 
above-mentioned  precautions  are  taken.  But  at  the  end  of  any 
year,  this  is  a  particularly  easy  thing  to  find  out;  because  the 
total  charged  to  any  group  of  Standing  Orders  forming  one  factor 
must  equal  the  amount  originally  set  out  on  the  factor  schedule 
when  setting  the  machine  rates.  That  is  the  last  and  final  proof 
of  correctness.  If  such  amounts  are  substantially  alike,  then  no 
fear  as  to  correctness  of  machine  rates  need  be  entertained.  If  a 
discrepancy  is  found,  it  means  that  a  new  factor  schedule  must  be 
gotten  out  with  the  new  figures  as  its  basis,  and  machine  rates 
altered  accordingly.  Unless  the  discrepancy  is  a  gross  one,  no 
great  harm  is  done  when  supplementary  rate  is  charged  up  to 
Production  Orders.  It  will  merely  have  had  the  effect  of  showing 
true  cost  a  little  higher  or  lower  than  it  ought  to  be,  and  inversely 
affecting  the  amount  shown  as  supplementary  rate.  And  on 
any  individual  order  this  error  should  be  a  small  one  indeed. 


CHAPTER  XXII 

COLLECTING  DEPARTMENTAL  COSTS 

When  costing  has 'been  carried  out  on  either  of  the  three 
methods  described  in  former  chapters,  the  stage  at  which  the 
costing  process  has  arrived  may  be  summed  up  as  follows: 

1.  The  work  in  any  department  will  be  represented  by  a  set 
of  Production  Order  Cost  Sheets  or  Component  Order  Cost 
Sheets  on  each  of  which  the  cost  to  date  of  specific  items  of  the 
work  may  be  found. 

2.  The  aggregate  of  the  items  inscribed  on  the  set  of  Cost 
Sheets  will  be  contained  in  the  Manufacturing  account.  The 
Cost  Sheets  are  in  fact  the  subdivision  or  detail  of  the  balance  in 
Manufacturing  account,  just  as  we  saw  in  a  former  chapter  the 
Stores  Item  Cards  were  the  subdivision  of  the  balance  in  Stores 
account. 

If  there  are  also  Plant  Addition  Orders,  their  Cost  Sheets  will 
be  the  detail  of  the  balance  in  Plant  Additions  account  in  the 
same  way. 

All  these  remarks  apply  to  one  productive  department.  There 
may  be  several  such  departments,  each  containing  work  in  process 
and  each  carrying  the  detail  cost  of  such  work  to  date  on  a  set  of 
Cost  Sheets,  and  a  balance  in  their  Departmental  Manufacturing 
account  corresponding. 

Further,  cases  have  been  instanced  in  which  material  is  not 
charged  to  departments  but  to  a  Material  account,  the  detail 
being  recorded  on  Material  Cost  Sheets.  In  this  case  material 
ranks  as  a  department.  Material  account  will  contain  a  balance 
of  which  the  Material  Cost  Sheets  are  the  item  details. 

We  have  now  to  consider  what  happens  when  an  item  of  work 
is  finished  as  regards  a  department,  passes  out  of  it,  and  goes 
somewhere  else.  As  far  as  that  department  is  concerned  it  no 
longer  exists,  and  steps  must,  therefore,  be  taken:  (1)  to  take  its 
value  out  of  the  Departmental  Manufacturing  or  Plant  Addi- 
tions account,  and  charge  it  to  some  other  account  according  to 
what  has  been  done  with  it;  and  (2)  to  withdraw  the  correspond- 

377 


378      MANUFACTURING  COSTS  AND  ACCOUNTS 

ing  (  !os1  Sheet,  and  send  it  to  some  other  quarter,  where  it  will 
become  the  subdivision  of  the  new  account. 

Before  discussing  this  further  stage  of  costs,  it  will  be  well, 
however,  to  obtain  a  clear  picture  of  the  nature  of  the  informa- 
tion contained  in  the  Cosl  Sheets.  From  what  has  been  said 
in  the  chapters  en  "  ( !os1  ing,"  it  will  be  obvious  that  on  all  the  three 
methods  the  costs  obtained  are  in  all  cases  costs  of  processes. 
The  data  recorded  are  based  on  the  time  spent  on  a  given  order 
by  a  man,  or  by  a  machine,  or  by  both  together,  Now  the  way 
in  which  this  data  fan  be  identified  with  product  will  depend  on 
the  way  in  which  the  orders  have  been  issued. 

If  Production  Orders  alone  have  been  issued,  then  in  each 
department,  there  will  be  a  record  on  one  Cost  Sheet  of  all  the 
process  work  done  in  that  department.  If  there  is  only  one 
process,  then  whatever  appears  on  the  Cost  Sheet  will  be  the  cost 
of  that  process.  If  the  order  has  been  issued  to  several  depart- 
ments we  shall  have  a  (  'ost  Sheet  in  each  department  showing  the 
cosl  of  the  process  carried  out  by  each  department.  If,  then,  we 
collect  the  Cost  Sheets  belonging  to  that  Production  Order,  we 
-hall  have: 

1.  Cost  of  the  whole  order,  subdivided  by  departmental  cost,  viz., 
one  process  in  each  department. 

On  the  other  hand,  there  may  be  several  processes  carried  on  in 
each  department,  and  our  work  may  pass  through  all  or  some  of 
them.  In  that-  case  the  Departmental  Cost  Sheet  will  carry 
dat  a  a-  to  each  of  these  processes,  and  we  shall  be  able  to  identify 
the  cost  of  each  individual  process  by  its  machine  number. 
If  Beveral  departments  have  been  engaged  on  the  Production 
(  >rder,  then  each  Departmental  Sheet  will  carry  the  cost  of  the 
various  processes,  each  identifiable  separately.  Consequently, 
if  we  colled  t  he  \  arious  Depart  mental  Cost  Sheets  and  summarize 
them,  we  shall  have: 

2.  (  "•  /  of  the  whole  order,  subdivided  t>y  departmental  cost,  and 
also  by  processes   irilhin  each  department. 

This  is  as  fai  as  we  can  go  by  means  of  Production  Orders  only. 
The  information  gives  us  t  he  cosl  of  work  indicated  on  the  order, 
and  of  the  differenl  kinds  of  work,  but  it  does  not  give  us  any 
information  aboul  the  cost  of  different  parts,  should  it  happen 
thai  the  producl  in  question  consists  of  parts.  It  is  true  that 
in  some  cases,  even  this  information  san  be  deduced  from  the 
of  a  Production  Order,  but  only  if  single  processes  are  never 


COLLECTING  DEPARTMENTAL  COSTS  379 

duplicated  on  different  parts.  Thus  if  in  a  department  we  have 
six  processes,  and  two  of  them  are  confined  to  pari  a,  one  to  pari 
b,  and  three  to  part  c,  then,  of  course,  whenever  we  see  a  record 
of  these  processes  on  the  Production  Order  we  known  that  certain 
parts  and  not  other  parts  are  referred  to.  In  this  single  case,  we 
may  say  that  Production  Order  costs  give  us: 

2a.  Cost  of  the  whole  order,  subdivided  by  departmental  cost,  and 
(conditionally)  by  the  cost  of  process  work  on  parts. 

In  general,  however,  if  our  product  consists  of  parts  which  are 
made  separately  and  subsequently  collected  and,  it  may  be, 
assembled  or  fitted  together,  it  will  be  necessary  to  issue  orders 
to  cover  each  separate  kind  of  part.  This  is  effected  by  the 
device  of  Component  Orders,  each  such  order  dealing  with  a 
separate  kind  of  part,  although,  as  in  the  case  of  the  Production 
Order,  any  Component  Order  Cost  Sheet  may  have  a  record  of 
several  processes  on  it.  When  Component  Orders  are  issued, 
they  supersede  the  Production  Order  as  far  as  Cost  Sheets  are 
concerned,  since  instead  of  issuing  one  Cost  Sheet  for  the  whole 
of  a  Production  Order  in  any  department  we  issue  as  many  sepa- 
rate Component  Orders  as  there  are  separate  kinds  of  parts  to 
be  made,  and  each  of  these  has  its  own  Cost  Sheet.  Conse- 
quently, when  we  collect  all  the  Component  Cost  Sheets  relating 
to  one  Production  Order,  we  shall  have: 

3.  Cost  of  the  xohole  Production  Order.  Cost  of  each  separate 
component.     Cost  of  each  separate  process  on  each  component. 

This  is  the  ultimate  subdivision  possible.  No  more  detailed 
question  about  costs  can  be  asked  than  is  furnished  by  this 
arrangement  of  Production  Orders  and  Component  Orders. 
Where  parts  have  to  be  assembled  and  fitted  together,  the  final 
Component  Order  is  a  "Fitting"  or  "Assembling"  Order,  which 
records  the  cost  of  completing  the  work  and  erecting  the  separate 
components  into  a  completed  article.  Where  "part"  or  "com- 
ponent" is  used  above,  it  does  not  imply  single  pieces.  A 
Component  Order  may  be  for  1,  GO  or  10,000  pieces,  but  they 
must  be  all  exactly  alike. 

Material. — Whether  or  not  the  cost  of  direct  material  is  charged 
to  Department  Production  Orders  (or  to  Component  Orders  when 
these  are  in  use)  is  a  matter  of  indifference  as  regards  the  final 
result.  The  principal  guiding  rule  will  be  the  possibility  of  iden- 
tifying the  material  with  the  final  subdivision  of  cost  we  make. 
If  the  product  is  not  composed  of  parts,  then  in  general  it  will  be 


380      MANUFACTURING  COSTS  AND  ACCOUNTS 

better  to  charge  material  to  Material  Cost  Sheets,  which  will 
rank  as  Departmental  Cost  Sheets;  that  is  to  say  we  shall  have 
several  Departmental  Cost  Sheets  dealing  with  labor  and  burden 
in  each  department  and  one  Material  Cost  Sheet  dealing  with 
material  for  the  whole  Production  Order.  This  arrangement 
will  answer  very  well,  also,  when  the  material  used  on  different 
parts  is  of  a  specific  kind,  as,  for  example,  upper  leather,  sole 
leather,  heels,  buttons,  etc.  in  shoemaking,  because  the  identifi- 
cation of  the  cost  of  the  material  used  in  any  individual  com- 
ponent is  plain  and  not  ambiguous.  But  if  brass  sheet,  steel 
rod,  copper  plate,  etc.  are  being  issued  on  an  order,  and  any  one 
of  these  materials  may  be  used  on  more  than  one  part  or  com- 
ponent, then  confusion  can  easily  arise,  and  it  is  best  to  charge 
such  material  to  Departmental  Cost  Sheets  by  providing  columns 
for  such  data.  On  the  other  hand,  in  some  machine  manufacture 
everything  is  so  standardized  that  a  Bill  of  Material  can  be 
made  up  and  the  material  to  be  used  on  each  individual  part 
specified.  In  such  cases,  when  the  mere  filling  out  of  the  issue 
price  of  the  material  provides  a  classified  cost  of  material  on 
parts,  it  is  unnecessary  to  go  to  the  trouble  of  charging  material 
to  individual  Component  Cost  Sheets.  A  single  Material  Sheet, 
namely,  the  Bill  of  Material  itself,  together  with  a  record  of  any 
odd  or  sundry  material  that  may  have  been  unexpectedly  called 
for,  is  all  that  is  necessary.  In  this  case  the  process  cost  of  the 
components  is  contained  on  the  Component  Cost  Sheets,  and 
the  material  cost  on  the  Material  Sheet.  Placing  one  alongside 
the  oilier,  gives  the  entire  cost  of  the  component. 

\V1ki  i  is  t  rue  of  Production  Orders  is  also  true  of  Plant  Addition 
Orders.  Component  Orders  can  be  issued  in  connection  with 
these  if  required,  and  in  general  it  is  better  to  do  so,  since  in- 
dustries making  their  own  equipment  will  usually  be  of  such  a 
nature  as  to  require  Component  Orders  for  production.  But  if 
the  detailed  pari  cost  of  such  equipment  is  not  required,  then  a 
single  Production  Order  worked  on  in  each  department  will 
give  the  total  cost  of  the  equipment  when  all  the  Departmental 
Cosl  Sheets  are  collected.  Material  may  be  issued  to  a  separate 
Materia]  Cosl  Sheet  or  to  Component  Orders  if  these  are  used. 

There    is    in    fact     no    greal    difference    between    Production 

Order- and  Plant    Vddition  <  >rders  as  far  as  costing  is  concerned. 

are    called    by    different   names,   because   their  ultimate 

destination   i-  different,  and,  also,  as  explained  in  a  previous 


COLLECTING  DEPA R  TM EN  TA  L  <  '<  >S  TS 


381 


chapter  Plant  Addition  Orders  do 
not  take  supplementary  rate  on 
Method  C.  In  other  respects  a 
Plant  Addition  Order  is  a  Pro- 
duction Order,  only  it  is  produc- 
tion for  the  plant  itself,  instead 
of  being  for  sale.  It  is,  therefore, 
dealt  with  differently  at  the  stage 
we  have  now  reached. 

Every  month,  certain  Cost 
Sheets  will  be  withdrawn  from 
the  departmental  files,  owing  to 
work  having  been  completed  on 
them  as  far  as  that  department 
is  concerned.  These  Cost  Sheets 
will  contain  an  amount  of  detail 
as  to  the  cost  of  the  Production 
Orders  they  represent,  according 
to  the  way  in  which  orders  were 
originally  issued.  With  this  we 
have  no  further  concern.  A  Cost 
Sheet  is  a  Cost  Sheet,  and  repre- 
sents the  cost  of  a  certain  definite 
quantity  of  work  done  in  the  shop 
on  a  definite  item  or  items  of 
material.  We  have  now  to  con- 
sider the  following  steps: 

1.  The  Production  or  Compo- 
nent Order  Cost  Sheet  must  be 
withdrawn  from  the  department 
files,  and  entered  on  a  Finished 
Department  Orders  Journal,  Fig. 
108;  and  also  on  the  Production 
Order  Cost  Summary  Sheet,  Fig= 
112. 

2.  When  all  finished  orders  for 
the  month  have  been  entered  on 
this  journal,  the  Department 
Manufacturing  account  will  be 
credited,  and  a  Finished  Depart- 
ment Orders  account  charged. 


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382      MANUFACTURING  COSTS  AND  ACCOUNTS 

3.  The  Cost  Sheet  will  now  be  filed  in  the  cost  office  under 
its  production  number.  The  aggregate  contents  of  this  file 
at  any  month  end  will  be  equal  in  amount  to  the  balance  standing 
in  Finished  Department  Orders  account.  They  will  be  in  fact 
the  Item  Cards  of  that  account,  just  as,  when  still  in  the  de- 
partment, they  were  the  Item  Cards  of  the  Departmental 
Manufacturing  account. 

Finished  Department  Orders  account  will  thus  represent 
work  which  lias  passed  out  of  certain  departments,  but  which 
is  no1  yet  completed  as  regards  the  factory.  The  actual  physical 
location  of  the  parts  represented  by  the  sheets  in  question  will 
depend  on  circumstances.  In  assembling  industries,  the  balance 
in  Finished  Department  Orders  account  will  virtually  represent 
the  value  of  goods  in  the  assembling  stores.  In  other  cases, 
where  the  work  is  passed  from  one  department  'to  another,  the 
goods  represented  by  the  balance  in  this  account  will  be  dis- 
persed  throughout  the  plant.     It  will  be  obvious  that  in  the 


Prod. 
Order  No. 

No.of 
Sheets 

Description 

Class 
A 

Class 
B 

Class 

c 

Class 
D 

Fig.   109. — Finished  Goods  Journal. 


latter  case,  we  could  credit  the  department  parting  with  the 
goods  and  charge  the  department  receiving  them.  This  is  a 
practice  thai  i-  actually  followed,  but  involves  complex  book- 
keeping,  and  it  is  often  difficult  to  see  what  advantage  is  gained. 
The  increasing  cost  from  stage  to  stage  of  manufacture  is  thus 
shown,  it  is  true,  but  so  it  is  by  the  far  simpler  method  now 
described.  It  is  chiefly  useful  when  product  is  salable  or  pur- 
chasable ae  a  departmental  product,  e.g.,  castings  in  a  foundry. 
On  the  right-ham  I  side  of  the  large  folding  general  diagram, 
the  operations  jusl  described  can  be  followed  out.  At  the 
top  ie  shown  a  Cos1  Sheel  representing  a  piece  of  work  that  is 
finished  ae  far  as  departmenl  5  is  concerned.     This  Cost  Sheet 


COLLECTING  DEPARTMENTAL  COSTS 


383 


may  be,  as  already  shown, 
either  a  Production  Order  Cost, 
Sheet,  or,  where  Component 
Orders  are  in  use,  it  will  be  a 
Component  Order  Cost  Sheet. 
Its  entry  on  its  own  Production 
Order  Summary  Sheet  and  on 
the  Finished  Department  Orders 
Journal  is  indicated,  and  from 
this  journal  a  credit  line  is  traced 
to  the  Department  5  Manufac- 
turing Journal,  on  the  one  hand, 
and  a  debit  line  to  the  Finished 
Department  Orders  account  on 
the  other. 

The  next  stage  is  reached 
when  all  the  Cost  Sheets  con- 
nected with  a  given  Production 
Order  number  have  (summarized 
on  a  Summary  Cost  Sheet,  Fig. 
112)  been  passed  through  in  this 
way  to  the  debit  of  Finished 
Department  Orders  account. 
The  Production  Order  itself  is 
now  wholly  completed,  and  de- 
livered to  the  selling  arm.  Con- 
sequently, as  will  be  seen  from 
the  diagram,  all  the  Cost  Sheets 
relating  to  the  Production  Order 
are  collected,  and  their  total 
cost  (as'  shown  also  on  the  Pro- 
duction Order  Summary)  entered 
on  a  Finished  Goods  Journal, 
Fig.  109,  and  charged  to  a  Fin- 
ished Goods  account.  There 
will,  in  general,  be  more  than 
one  of  such  accounts,  each  being 
devoted  to  a  different  line  of 
product. 

It  will  be  obvious  from  an  in- 
spection of  the  general  diagram 


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384     MANUFACTURING  COSTS  AND  ACCOUNTS 

that,  if  desired,  the  crediting  of  the  Departmental  Manufactur- 
ing accounts  and  the  charging  of  Finished  Goods  account  could 
take  place  at  one  time,  thus  eliminating  the  intermediate  stage 
of  Finished  Department  Orders  account.  The  diagram,  Fig.  Ill, 
shows  this  short  cut.  No  credits  are  made  to  the  Departmental 
Manufacturing  accounts  until  all  the  Cost  Sheets  for  a  Produc- 
tion Order  are  completed.  They  are  then  entered  as  one  item 
in  the  Finished  Goods  Journal  (Fig.  110),  the  amounts  charged 
for  departmental  work  being  entered  in  the  departmental  columns 


Collected  Cost  Sheet 

of  One  Production 

Order 


Finished 
Goods  Accts 


Finished 
Goods  Jn'l 


>' 


^ 


Credits  to 
■  ^   Dept.Mfg.  Acct. 


Fig.  111. — Production  Order  Costs  credited  to  Manufacturing  account 
and  charged  direct  to  Finished  Goods  accounts. 


at  the  right  hand,  and  the  total  cost  of  the  order  charged  to  the 
finished  goods  column  on  the  right  hand  which  represents  the 
class  of  product  th.it  has  been  made  on  the  order.  Credits  to 
the  various  departmental  accounts  arc  then  made  when  the 
journal  is  totalled,  and  correspondingly  debits  are  made  to  the 
various  Finished  ( roods  accounts. 

The  disadvantage  of  this  short  cut  is  that  Departmental 
Manufacturing  accounts  are  not  cleared  as  soon  as  they  have 
finished  work  on  any  order.  As  long  as  any  part  of  an  order  is 
uncompleted,  the  amounts  standing  against  that  order  in  every 
departmental  journal  must  remain,  even  though  the  department 
has  long  ago  finished  its  portion  of  the  order.  In  some  classes  of 
business,  tin-  would  not  he  a  serious  disadvantage,  but  in  other 


COLLECTING  DEPARTMENTAL  COSTS 


385 


cases,  where  work  is  complex 
and  consists  of  large  numbers 
of  components,  it  is  a  great 
advantage  to  be  able  to  know 
at  each  month  end,  exactly 
the  value  of  work  in  process 
in  each  department.  If  this 
is  increasing,  it  means  that 
the  department  is  falling  be- 
hind in  its  work,  whereas  if 
Manufacturing  accounts  are 
not  cleared  until  every  de- 
partment has  finished,  the 
figures  cannot  be  read  in  this 
way. 

Plant  Addition  Orders. — 
The  completed  Plant  Addi- 
tion Orders  in  each  depart- 
ment having  been  charged  to 
a  Departmental  Plant  Addi- 
tions account,  a  similar  pro- 
cedure to  that  described 
above  must  be  gone  through 
to  clear  these  accounts.  The 
same  rulings  may  be  used  in 
the  journals  allotted  to  plant 
additions,  except  that  instead 
of  debiting  the  cost  of  com- 
pleted Plant  Addition  Orders 
to  Finished  Goods  accounts, 
they  are  charged  up  to  the 
various  Plant,  Equipment, 
Buildings  and  other  main 
ledger  accounts  on  the  left 
hand  of  the  diagram.  In 
many  cases,  however,  this  is 
not  done  save  at  half-yearly 
or  yearly  intervals.  In  this 
case,  a  Finished  Plant  Addi- 
tions account  may  be  set  up, 
and   the   cost   of  Completed 

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386      MANUFACTURING  COSTS  AND  ACCOUNTS 

Plant  Addition  Orders  charged  to  it.  Then  at  the  end  of  the 
financial  period  the  items  contained  in  this  account  can  be 
transferred  to  the  Plant  accounts  concerned  by  means  of  gen- 
eral journal  entries.  Plant  Orders  for  auxiliary  equipment  are 
sometimes  transferred  to  a  Production  Order,  as  when  special 
patterns  and  tools  have  been  made  to  carry  out  a  special  order 
(see  Chap.  X,  Part  I). 

The  final  stages  of  costs  have  now  been  discussed.  The  various 
Departmental  Manufacturing  accounts  have  been  cleared  of 
finished  work,  represented  in  detail  by  Cost  Sheets.  When  all 
the  Cost  Sheets  pertaining  to  an  order  are  collected,  Finished 
Goods  accounts  are  charged  with  the  total  cost  of  the  order. 
These  two  operations  (credit  and  debit)  are  sometimes  carried 
out  simultaneously  but  sometimes  an  intermediate  step  is  inter- 
calated; by  which  those  portions  of  an  order  that  are  department- 
ally  finished  are  credited  to  the  department  and  charged  to  a 
general  Finished  Components  account  until  the  whole  order  is 
completed.  Only  then  is  Finished  Goods  account  charged,  and, 
of  course,  Finished  Components  account,  or  as  it  has  been  termed 
above  "Finished  Department  Orders  account"  is  credited.  In 
either  case,  whether  by  a  shorter  or  longer  path,  the  general 
effect  is  that  work  done  in  the  shops  is  credited  to  the  shops  and 
charged  up  to  the  selling  arm. 


CHAPTER  Will 
FINAL  REMARKS  ON  COSTING 

The  entire  routine  of  costing  has  now  been  covered.  Com- 
mencing with  purchases,  we  have  seen  how  these  are  transformed 
into  product.  The  intermediate  stages  are  many  and  compli- 
cated, and,  of  course,  it  has  been  impossible  to  cover  many  side 
issues  which  constantly  arise  in  practical  cost  keeping.  Bui  it 
is  believed  that  if  the  student  has  acquired  a  thorough  grasp  of  the 
detail  given,  and  has  been  able  to  understand  the  reasons  for  each 
step  that  has  been  described,  he  will  not  find  great  difficulty  in 
applying  the  same  principles  to  any  particular  case.  The  great 
secret  of  correct  cost  keeping  is  departmentalization.  This 
applies  throughout  all  the  operations  and  not  merely  to  the 
division  into  actual  departments.  Every  step  in  the  whole 
process  must  have  its  own  clearly  defined  sphere.  It  must  carry 
the  costing  operation  from  one  well-defined  point  to  another. 
This  rule  can  be  applied  with  advantage  in  making  whatever 
developments  are  necessary  in  particular  plants. 

Another  rule  that  might  advantageously  be  kept  in  mind  is  to 
set  up  as  few  ledger  accounts  as  possible.  Ledger  accounts  are 
only  necessary  when  they  contain  balances.  Thus,  many  ac- 
countants set  up  large  series  of  Expense  accounts,  the  use  of 
which  is,  to  say  the  least,  not  very  manifest.  The  general  idea 
is  to  provide  a  basis  for  reports  and  returns,  but  as  long  as  all 
figures  are  locked  in  with  the  ledger  accounts  as  they  are  in  all  the 
methods  described  in  this  work,  then  reports  can  be  compiled 
from  the  assembled  figures  in  the  Standing  Order  Cost  Sheets 
without  charging  these  to  separate  ledger  accounts  for  the  pur- 
pose. Moreover,  statistics  taken  from  ledger  accounts  are 
usually  too  stale  to  be  of  much  service  to  the  technical  ami. 
This  aspect  of  the  cost  problem  will  be  discussed  in  Part  III, 
which  deals  with  "Reports  and  Returns." 

Auxiliary  Equipment. — From  what  has  been  described  in  former 
chapters  it  will  be  understood  that,  by  the  issue  of  properly 
arranged  orders,  the  cost  of  any  item  of  product,  and  any  kind 

387 


388      MAM  FACT  (KING  COSTS  AND  ACCOUNTS 

of  expense  can  be  separately  recorded.  In  the  case  of  expense, 
collected  through  Standing  Orders,  the  Cost  Sheets,  represent- 
ing the  different  kinds  are  merged  at  an  early  stage  of  operations 
in  a  total  of  departmental  burden,  and  so  disposed  of,  by  being 
spread  over  Production  Orders. 

But  Production  Orders  (with  their  subdivisions — Component 
Orders)  have  two  variants:  Production  Orders  proper,  repre- 
senting salable  goods,  and  Plant  Addition  Orders,  representing 
possibly  additions  to  buildings,  new  machinery  and  equipment, 
etc.  Out  also  frequently  representing  items  of  auxiliary  equip- 
ment, the  difficulties  surrounding  which  were  dwelt  on  in  Chap. 
X  (Part  1).  Some  additional  information  must  now  be  given 
a-  to  the  way  in  which  auxiliary  equipment  is  charged  up  to 
production. 

The  simplest  case  is  that  where  such  equipment  (tools,  jigs, 
patterns,  etc.)  is  going  to  be  used  for  only  one  order,  after  which 
it  will  be  consigned  to  the  scrap  heap.  In  this  case,  after  the  cost 
of  the  equipment  has  been  determined  through  a  Plant  Addi- 
tion- Order,  the  cost  of  the  latter  is  transferred  to  the  former, 
being  credited  from  Plant  Additions  account  to  Finished -Goods 
account,  and  forming  part  of  the  production  cost  of  the  order  as 
chargeable  against  sale  price  to  ascertain  gross  profit. 

Usually,  however,  no  such  easy  method  of  dealing  with 
auxiliary  equipment  will  present  itself.  Its  cost  must  be  dis- 
tributed to  production  by  means  of  a  depreciation  rate,  and 
handled  through  Standing  Orders  like  any  other  class  of  ex- 
pense. Frequently,  also,  depreciation  is  not  the  only  charge 
picked  up  by  such  items  during  their  life.  Patterns,  for  in- 
stance, require  storing  in  proper  buildings,  tools  and  jigs  also,  and 
in  plants  of  any  size,  there  will  probably  be  attendants  whose 
work  is  to  take  care  of  the  equipment,  attend  to  its  issue  when 
wanted,  and  secure  its  due  ret  urn.  This  amounts  to  the  erection 
of  a  department  or  more  than  one  department  devoted  to  such 
work.  And  the  cost  of  this  department,  like  that  of  any  other 
expense  department  must  be  prorated  over  the  departments  it 
benefits.  Thus  the  pattern  storage  will  be  charged  to  foundry 
expense;  tool-room  Btorage  will  be  prorated  over  the  machine 
shops;  bul  where  the  industry  is  a  simple  one,  the  depreciation 
of  patterns  and  auxiliaries  with  t he  expense  of  looking  after  them 
and  storing  them  will  be  charged  by  classes  of  goods  rather  than 
to  any  one  department.     Thus  the  cost  of  shoe  lasts,  printing 


FINAL  REMARKS  ON  COSTING 

rolls,  and  such  like  must  be  distributed  over  the  actual  work 
done  with  each  variety,  so  that  a  line  of  goods  requiring  no  ex- 
pensive extras,  does  not  get  charged  with  such  extras.  Or  what 
is  more  frequently  the  case,  a  standard  line  of  goods  which  will 
use  its  auxiliary  equipment  until  it  is  quite  worn  out,  must  not 
be  charged  with  the  cost  of  special  equipment  used  for  a  variety 
of  product  in  limited  demand. 

Thus  is  introduced  into  the  accounting  scheme  what  may  be 
termed  class  burden,  that  is,  burden  that  is  confined  to  certain 
classes  or  kinds  of  product  and  not,  therefore,  distributable  by 
any  of  the  methods  hitherto  described.  Where  this  type  of 
burden  exists  a  separate  Class  Burden  Journal  should  be  set  up, 
similar  to  the  ordinary  Burden  Journal  but  collecting  those  items 
that  are  confined  to  particular  classes  of  salable  goods,  especially 
the  depreciation  on  auxiliary  equipment  of  the  kind  mentioned 
above.  Standing  Orders  will,  of  course,  be  issued  and  Cost 
Sheets  kept  for  the  monthly  record  of  all  such  items,  and  credits 
will  be  made  to  the  main  accounts  where  these  are  concerned, 
just  as  in  the  case  of  the  ordinary  Burden  Journal,  and  various 
productive  departments  will  be  charged,  but  not  in  one  total.  The 
charge  to  each  productive  department  will  be  divided  up  so 
that  so  much  is  assigned  to  class  A  product,  so  much  to  class  B 
product,  and  so  on.  When  the  Production  Orders  are  listed  in 
the  Department  Manufacturing  Journal,  these  separate  amounts 
must  be  distributed  over  the  orders  they  belong  to,  making  use 
of  a  separate  class  burden  column  for  the  purpose. 

The  subject  is  such  a  complicated  one  and  has  so  many 
variations  in  practice  that,  in  an  elementary  work  like  this, 
it  is  impossible  to  indicate  more  than  the  general  lines  of  its 
treatment.  The  principal  things  to  be  sot  up  as  mechanism  in 
connection  wTith  class  burden,  are : 

1.  Some  originating  document  recording  the  use  of  the  auxil- 
iary equipment,  the  order  for  which  used,  and  the  quantity 
of  product  resulting. 

2.  The  Depreciation  Schedule  should  contain  the  depreciation 
charge  for  such  item  per  unit  of  product  as  fixed  by  the  technical 
officers,  and  thus  the  correct  amount  to  be  charged  to  the  order 
may  be  determined  and  marked  on  the  document. 

3.  A  Class  Burden  Journal  will  list  these  documents,  make 
the  necessary  credits  to  Depreciation  account,  and  charge  the 
Burden  accounts  of  the  departments  using  the  equipment. 


390      MANUFACTURING  costs  AND  ACCOUNTS 

4.  In  Manufacturing  Journals  a  special  column  for  class 
burden  will  be  set  up,  and  in  this  column  the  individual  charges 
on  the  originating  documents  will  be  entered  against  the  proper 
order  numbers,  and  on  the  corresponding  Cost  Sheets.  In  this 
way  the  class  burden  will  be  carried  to  the  debit  of  Manufacturing 
account,  and   Depart  mental   Burden  account  will  be  credited. 

Depreciation  on  auxiliary  equipment  is,  of  course,  a  relative 
term.  It  docs  not  imply  the  natural  term  of  life  of  the  appliance, 
but  its  expected  useful  life.  And  as  a  general  rule  it  is  safer  to 
base  this  on  the  number  of  times  it  will  be  used,  that  is  on  the 
quantity  of  product  it  will  turn  out,  than  on  ordinary  time  rate. 
If  we  have  a  se1  of  shoe  lasts,  and  expect  to  make  1,000  pairs  of 
shoes  from  them  within  a  year,  after  which  it  is  practically 
certain  that  the  pattern  will  go  out  of  fashion,  then  the  de- 
preciation charge  should  be  made  1/1,000  of  the  cost  for  each 
pair  turned  out,  and  no  attempt  made  to  bring  the  one  year 
into  the  problem  at  all.  And  in  fixing  such  a  rate,  a  conservative 
view  should  be  taken,  and  if  there  is  any  question  as  to  the  ex- 
pected  life  of  the  appliance  the  probable  minimum  rather  than 
the  probable  maximum  should  be  taken.  But  the  whole  question 
is  a  very  intricate  one,  and  depends  for  its  successful  solution  on 
shrewd  judgment  on  the  facts  of  every  particular  case. 

Departments  Using  Different  Methods. — From  what  has 
been  said  as  to  the  necessity  for  first  departmentalizing  all  cost, 
before  distributing  it  to  Orders  on  one  of  the  three  Methods  A, 
B,  or  C,  it  will  be  readily  understood  that  we  are  not  obliged  to 
use  any  one  method  in  all  departments.  Thus  one  depart-' 
menl  may  do  work  thai  is  suitable  for  costing  on  A.  Another 
department  may  contain  a  set  of  machines  so  uniform  in  char- 
acter t  hat  Met  hod  B  is  cpiite  proper.  I  >thers  again  may  contain 
production  centers  differing  widely  among  themselves,  so  that 
Method  C  is  the  only  safe  costing  system.  Should  it  happen  that 
a  given  Production  Order  is  worked  on  in  all  such  departments, 
no  difficulty  arises,  since  each  department's  work  appears  on  a 
separate  Cosl  Sheet,  and  provides  a  complete  cost  whatever 
the  method  of  arriving  at  thai  cost.  The  total  of  all  Depart- 
mental <  losl  Sheets  will  still  be  the  total  cost  of  the  Production 
Order  as  a  whole.  Similarly,  the  work  in  one  department  might 
justify  Componenl  Orders,  while  in  others  no  such  necessity 
might  arise.  This  would  simply  mean  that  the  latter  depart- 
ment- would  work   to  i  hi'  Production  Order  number,  and  pro- 


FINAL  REMARKS  ON  COSTING  391 

vide  on  Cost  Sheet  for  all  their  work  on  the  Production  Order; 
the  other  department  would  not  work  to  the  Production  Order 
number  but  to  a  series  of  component  numbers,  and  that  de- 
partment would  consequently  turn  in  several  sheets  as  repre- 
senting their  work  on  the  Production  Order.  No  difficulty  can 
arise  in  combining  departmental  cost  data,  since  each  depart- 
ment is  absolutely  independent  of  every  other. 

Spoilage. — From  what  was  said  in  Chap.  IX  (Part  I)  as 
to  Replacement  Orders,  it  will  be  understood  that  the  column 
headed  "Spoilage"  in  the  Department  Manufacturing  Journal 
is  intended  to  take  the  cost  of  such  Replacement  Orders.  Their 
aggregate  is  then  charged  to  Spoilage  account.  This  account 
will  probably  receive  debits  from  all  the  productive  departments, 
and  though  the  amount  standing  to  its  debit  at  the  month  end 
is  charged,  through  Standing  Orders  and  Burden  Journal  to 
productive  departments,  it  must  not  be  overlooked  that  the 
department  making  any  given  debit  does  not  necessarily  bear 
the  expense  of  that  debit.  The  department  to  which  it  is 
chargeable  is  the  department  responsible  for  the  spoilage.  Thus 
a  piece  or  component  may  have  passed  through  several  depart- 
ments, and  finally  a  flaw  is  discovered,  due  to  a  bad  casting.  All 
the  cost  of  the  Replacement  Order  through  all  departments 
will  be  chargeable  against  the  foundry.  Similarly,  if  a  mistake 
made  in  one  department  is  disclosed  only  at  a  later  stage,  the 
first  department  is  clearly  responsible,  and  must  be  charged  with 
the  whole  cost  of  the  Replacement  Order. 

Summarizing  Production  Orders. — A  Production  Order  should 
in  all  cases  show,  in  addition  to  the  actual  cost  of  production  as 
collected  from  the  Departmental  and  Component  Cost  Sheets, 
the  cost  of  auxiliary  appliances  made  specially  in  connection 
with  it,  even  if  not  chargeable  entirely  to  the  order,  and  also  the 
cost  of  spoiled  work  arising  out  of  the  order.  A  convenient  form 
for  summarizing  these  details,  and  for  assembling  the  cost  of 
selling  alongside  that  of  production,  and  thus  exhibiting  net  profit 
will  be  shown  in  Part  III.  Such  elaboration  is,  however,  chiefly 
suitable  for  industries  in  which  the  sold  units  are  large  and  cost  1  v , 
as  in  machine-making.  It  may,  however,  be  modified  for  any 
industry,  and  when  applicable  is  exceedingly  valuable. 


CHAPTER  XXIV 
THE  INCLUSION  OF  INTEREST  IN  COST 

Whether  or  not  interest  should  be  included  in  cost  of  produc- 
tion is  a  matter  on  which  authorities  are  wholly  at  variance. 
For  this  reason,  though  in  many  instances,  columns  have  been 
provided  for  interest  entries  in  blanks  described  in  former 
chapters,  nothing  has  been  said  about  the  inclusion  of  interest  in 
burden.  When  it  is  included,  an  Interest  Schedule  is  worked  out 
exactly  similar  to  the  Depreciation  Schedule,  Fig.  43,  except  that 
instead  of  "Depreciation  Rate"  the  words  "Interest  Rate" 
would  be  substituted.  In  many  cases,  however,  the  interest  and 
depreciation  rates  are  combined  in  one  by  means  of  an  amorti- 
zation  table.  The  employment  of  this  method  belongs,  however, 
to  advanced  accounting,  and  cannot  be  described  here. 

Otherwise,  whenever  the  term  depreciation  has  been  used  in 
any  of  the  blanks  and  rulings  in  former  chapters,  it  may  be  under- 
stood that  an  interest  charge  calculated  in  the  same  way  and  for 
the  same  items  as  the  depreciation  charge,  but  uniform,  say  6 
per  cent.,  for  all  classes  of  plant  and  equipment,  may  be  included 
also,  since  both  are  charges  for  the  use  of  the  equipment.  Stand- 
ing Orders  would  be  issued  to  cover  an  interest  charge  on  each 
class  of  equipment  in  each  department,  just  as  they  are  issued  for 
depreciation  charge.  In  fact,  as  said  above,  depreciation  rates 
can  be  arranged  so  as  to  include  depreciation  and  interest  in  one 
rate.  Winn  interest  is  charged,  an  additional  column  will  be 
Deeded  in  Burden  Journal  alongside  that  for  depreciation,  in 
order  to  collect  credits  to  Interest  account.  Debits  will,  of  course, 
be  made  to  the  different  departments  precisely  as  in  the  case  of 
depreciation.  Interest  thus  passes  into  department  burden  and 
es  to  have  any  separate  existence. 

If  interest  is  included,  however,  the  machine  rates  used  in 
Method  (J  will  require  an  interest  charge  included  for  each 
production  factor,  including,  of  course,  the  individual  machine 
factor.  Wherever  in  Chap.  XX  (Part  II)  depreciation  charges 
are  mentioned,  interest  charges  would  be  required  also,  or  a  com- 

392 


THE  INCLUSIOX  OF  INTEREST  IN  COST       393 

bined  interest  and  depreciation  charge.  Each  machine  rate  then 
contains  a  portion  of  its  total  made  up  of  interest,  and  thus 
interest  is  charged  to  Production  Orders  in  due  course. 

The  writer's  preference  is  for  including  interest  charges  on  all 
buildings,  plant  and  equipment,  especially  when  Method  C  is 
employed,  since  on  that  method  a  "weighting"  of  productive 
processes  according  to  the  amount  of  capital  locked  up  in  their 
equipment  is  effected  when  interest  is  included.  Many  excellent 
authorities,  however,  do  not  agree  with  the  writer  on  this  point, 
though  it  is  only  fair  to  state  that,  on  the  other  hand,  many  other 
good  authorities  recommend  the  practice. 

One  objection  sometimes  made  by  manufacturers  deserves  con- 
sideration. It  is  that  when  interest  is  charged  in  costs,  it  is  very 
difficult  to  say  how  much  is  included  in  a  given  order  (or  rather 
it  is  practically  impossible)  and,  therefore,  when  hard  times  de- 
mand a  rock  bottom  price,  it  is  not  easy  to  make  estimates  and 
bids  in  which  the  cost  of  interest  is  eliminated.  This  objection 
is  a  good  one.  But,  as  was  pointed  out  in  a  previous  chapter, 
machine  rates  on  Method  C  can  be  made  up  in  as  many  variations 
as  desired.  One  set  can  be  made  up  with  interest  for  cost  use  and 
one  set  without  interest  for  "hard  times"  estimating  purposes. 
Even  depreciation  may  also  be  left  out,  if  desperate  measures  are 
necessary,  but  this  is  a  practice  that  cannot  be  recommended, 
since  depreciation  is  a  real  cost  element,  while  interest  is  only  a 
measure  of  the  incidence  of  capital  values. 

The  term  "interest"  used  in  this  chapter  must  not  be  under- 
stood as  referring  in  any  way  to  commercial  interest,  such  as  is 
payable  by  the  firm  for  money  borrowed,  either  on  loans,  mort- 
gages or  bond  issues.  Such  interest  is  a  purely  financial  matter, 
and  has  obviously  nothing  to  do  with  the  efficiency  of  manufac- 
turing. Interest  as  defined  for  our  present  purpose  is  a  charge 
made  to  production  for  the  use  of  capital.  And  as  capital  is  used 
in  different  amounts  by  different  departments  and  service,  it  is 
only  right  that  a  measure  of  the  amount  of  capital  used  by  each 
should  be  included  in  the  cost  of  its  operations,  because  the  firm 
has  to  pay  interest  on  that  capital,  even  though  it  does  so  under 
the  guise  of  dividends.  And  when  we  come  to  subdivide  produc- 
tion to  its  ultimate  units  as  we  do  in  Method  C  then  it  becomes 
increasingly  important  that  the  use  of  capital  by  such  units, 
either  directly  as  a  charge  for  the  capital  value  of  the  machine 
or  production  center,  or  indirectly  by  including  interest  in  the 


394      MANUFACTURING  COSTS  AND  ACCOUNTS 

cost  of  service  departments  such  as  the  power  plant,  shall  form 
part  of  cost. 

Otherwise,  if  we  have  two  alternative  processes,  one  employ- 
ing little  machinery,  and  the  other  employing  very  costly 
machinery,  no  real  comparison  between  the  two  can  be  made 
unless  we  weight  them  both  with  their  proper  share  of  interest  for 
the  relative  amounts  of  capital  they  employ. 

Interest,  therefore,  to  sum  up,  is  a  charge  made  to  non-pro- 
ductive and  productive  departments,  through  Standing  Orders, 
for  the  use  of  capital,  and  is,  of  course,  in  proportion  to  the  amount 
of  capital  locked  up  in  various  forms  as  enumerated  in  the  De- 
preciation  or  Interest  Schedules.  It  is  a  matter  of  option  whether 
it  is  included  in  costs;  but  if  it  is  not,  some  of  the  advantages  of 
the  more  advanced  methods  of  costing  are  lost.  Whether  there 
arc  disadvantages  that  counterbalance  its  inclusion  on  this  ground 
remains  at  present  a  matter  of  opinion. 


PART  III 
FACTORY  REPORTS  AND  RETURNS 

Note. — The  following  pages  are  the  revised  substance  of  a  series  of 
articles  published  in  the  American  Machinist  in  September,  1915.  Though 
primarily  applicable  to  machine  shops,  and  to  costing  on  Method  C  the 
data  covered  in  the  reports  and  returns  described  will  be  necessary,  with 
modifications,  in  nearly  all  manufacturing  plants.  In  some,  of  course, 
considerable  extension  will  be  necessary,  some  productive  departments 
requiring  specially  designed  returns  to  bring  out  points  of  technical  im- 
portance, such  as  wastes;  the  proportion  of  "good"  tonnage  to  total  tonnage 
in  foundries;  and  many  others  items  of  a  special  character.  All  such 
returns  should  be  so  arranged  that  they  can  be  placed  before  the  right 
officials  promptly,  or  their  value  will  be  greatly  discounted. 


395 


CHAPTER  I 
THE  NATURE  OF  REPORTS  AND  RETURNS 

It  is  not  uncommon  to  find  a  certain  amount  of  friction 
existing  between  the  accounting  department  and  the  technical 
officials  in  a  large  plant,  due  to  the  fact  that  cost  systems  have 
several  uses,  and  are  very  often  not  designed  to  give  prominence 
to  more  than  one  of  such  uses  at  one  time.  Thus  a  system 
may  be  quite  satisfactory  to  the  president  or  proprietor  of  a 
business,  less  satisfactory  to  the  superintendent  and  estimating 
department,  and  a  mere  nullity  as  regards  shop  officials.  Con- 
versely, some  systems  with  which  everyone  in  the  shop  is  per- 
fectly satisfied,  and  that  give  fair  satisfaction  to  the  super- 
intendent, may  provide  results  that  are  quite  untrustworthy  and 
inconvenient  from  the  viewpoint  of  the  general  accountant,  and 
of  the  president  or  executive. 

This  is  because  the  shop  wants  its  data  red  hot,  and  will 
welcome  any  method  that  provides  it,  while  it  is  quite  uncon- 
cerned as  to  the  later  fate  of  the  statistics  or  how  they  arc  worked 
up.  The  higher  officials  on  the  other  hand  do  not  want  to  be 
overwhelmed  with  detail  but  want  accurate  results  assembled 
in  a  form  that  their  significance  can  be  quickly  grasped.  The 
higher  the  position  of  the  official  the  more  general  is  the  type  of 
information  he  requires,  but  also  the  clearer  and  more  systematic 
must  be  the  grouping  and  presentation. 

As  expenditure  on  orders,  both  standing  and  productive 
begins  in  the  shops,  we  shall  consider  first  what  the  shop  fore- 
man wants  to  know,  leaving  the  other  officials  till  later. 

What  the  Foreman  Should  Know. — The  foreman  is  concerned, 
first  and  foremost,  with  the  cost  of  jobs.  A  job  may  be  defined 
as  one  process  on  a  Production  Order,  or  if  Component  Orders 
are  in  use,  as  we  shall  assume  they  are,  then  a  job  is  one  process 
on  a  Component  Order.  It  is  the  foreman's  business  to  see  thai 
jobs  are  done  at  a  cost  not  exceeding  former  or  standard  cost, 
and  as  dozens  of  jobs  are  being  finished  daily  some  mechanism 
must  be  set  up  to  bring  to  his  attention  only  the  exceptional  job, 

397 


398      MANUFAi  TURING  COSTS  AND  ACCOUNTS 

which  has  rust  more  or  less  or  is  costing  more  or  less  than  was 
expected. 

For  this  information  to  be  of  any  use  to  the  foreman  he  must 
have  it  promptly  on  the  completion  of  the  job,  or  if  the  job  is 
a  long  one,  on  the  completion  of  some  allotted  portion  of  it. 
In  practice  this  mean-  not  later  than  next  day. 

Further,  it  is  most  desirable  that  the  information  should  be 
in  very  concrete  form.  A  mere  abstract  statement  conveys 
little  to  a  busy  man  surrounded  with  a  multitude  of  detail.  He 
must  be  able  to  see  and  handle  the  prime  records — the  original 
time  notes,  dips  or  card-,  and  all  the  information  they  bear. 

With  this  information  before  him,  and  the  man  at  hand 
who  did  the  job  no  longer  than  yesterday,  the  foreman  will  be  able 
to  lav  his  finger  promptly  on  the  reason  for  the  exceptional  cost. 
Unless  he  has  red-hot  data,  this  will  be  more  and  more  difficult 
as  time  goes  on,  and  his  investigation  will  become  merety  per- 
functory, and  he  will  regard  the  duty  of  making  it,  if  it  is  forced 
on  him  under  such  circumstances,  as  a  nuisance.  But  with 
prompt  report  to  him,  backed  by  the  original  documents  in  the 
case,  he  will  have  but  little  difficulty  in  assigning  the  correct 
reason  for  the  exceptional  cost. 

When  the  cause  has  been  assigned,  it  must  be  recorded  for 
future  reference.  A  register  of  extra  costs  classified  by  causes 
musl  be  kepi  up,  and  this  will  form  the  basis  of  improvement  as 
regards  such  causes  as  are  remediable  either  by  him,  or  by  some 
higher  authority. 

Watching  Idle  Machines.- — The  next  thing  that  it  is  important 
for  the  foreman  to  watch  closely  is  the  idleness  of  machines. 
From  adequate  time  notes,  the  working  hours  of  each  machine 
'•an  be  obtained  by  a  quick  sorting  and  aggregating.  Where 
machine  rates  are  in  use  the  money  value  of  machine  earnings 
is  also  easily  found.  By  a  simple  tabulation  on  a  properly 
tied  blank,  a  running  record  is  kept  of  each  machine's  work- 
ing time,  and  by  deducting  the  day's  total  from  standard  time 
and  earnings,  the  day's  loss  due  to  idle  machinery  is  made 
visible  to  the  foreman  each  morning.  This,  again,  is  a  kind 
of  information  thai  is  particularly  useless  2  or  3  weeks  or  a 
month  after  th<  facts  have  passed  into  history.  What  the 
foreman  want-  to  know  is,  "How  were  my  machines  occupied 
yesterday?"  not  how  they  were  occupied  at  some  past  period. 
lb    mould  be  able  to  cast  his  eye  over  their  earnings  orworking 


THE  NATURE  OF  REPORTS  AND  RETURNS     399 

time  day  by  day  for  the  past  few  days,  so  thai  be  can  Bee  how 
things  are  going. 

Balance  of  Work  in  Hand. — Next,  he  wants  a  good  idea  of  how 
the  work  is  coming  on — whether  he  is  keeping  up  with  it  or  falling 
behind.  Is  work  piling  up  half  finished  in  the  shop,  or  is  if 
being  carried  through  in  a  steady  stream?  Closely  connected 
with  this  information  is  the  total  of  the  pay-roll  from  day  to 
day,  and  its  division  into  productive  and  non-productive  work. 

At  the  end  of  each  day  there  will  be  a  certain  volume  of  un- 
finished jobs  (work  in  progress)  in  the  shop.  To  this  is  added 
today's  productive  wages,  and  from  it  is  deducted  the  wages  on 
jobs  finished  this  day.  The  resulting  amount  is  the  volume 
of  wages  on  work  in  hand  to  be  carried  forward  tomorrow. 
This  figure,  representing  the  volume  of  work  in  the  shops  each 
night,  is  of  value  to  the  foreman,  provided  he  gets  it  day  by  day. 
If  it  is  going  up  while  productive  wages  remain  steady,  it  shows 
congestion  of  half-finished  work.  A  little  familiarity  will  make 
this  a  highly  significant  figure  to  the  foreman. 

But  this  does  not  tell  him  how  he  stands  in  relation  to  orders 
in  sight.  This  information  cannot  always  be  provided  in  definite 
form.  It  can  be  furnished  only  in  the  case  of  work  that  is 
sufficiently  standardized  to  allow  the  expected  or  standard  cost 
to  be  placed  against  each  job  as  and  when  it  is  handed  to  the 
shop.  When  this  can  be  done,  then  the  total  expected  cost  of 
each  day's  jobs  will  be  added  to  the  expected  cost  of  all  jobs  in 
hand,  and  each  day's  completed  jobs  will  be  deducted  at  cost, 
leaving  a  balance  of  unexecuted  orders  as  at  each  night.  Every 
morning,  therefore,  the  foreman  will  have  a  figure  representing 
orders  on  hand  and  will  be  able  to  take  measures  as  to  overtime, 
extra  help,  etc.,  on  a  basis  of  actual  figures. 

Daily  Records  of  Spoiled  Work. — Another  matter  that  should 
be  brought  to  the  foreman's  attention  daily  is  the  "spoiled  work." 
This  should  receive  his  attention  in  the  same  manner  as  excep- 
tional jobs,  previously  mentioned.  His  opinion  as  to  the  cause 
of  each  item  should  be  indorsed  on  the  record,  and  a  tabulation 
by  causes  posted  up  against  men,  bad  castings,  or  other  visible 
causes. 

Indirect  or  Service  Expense. — We  may  now  consider  indirect- 
expense  items.  The  foreman  is  not  interested  in  the  large  ques- 
tion of  expense  save  at  the  points  at  which  his  responsibility  is 
incurred.     A  very  simple  return  will,  therefore,  satisfy  all  his 


hid      MANUFACTURING  COSTS  AND  ACCOUNTS 

needs.  He  is  interested,  first,  in  expense  items  incurred  in  his 
own  shop  and,  therefore,  under  his  own  control,  and  secondly, 
in  expense  labor  and  material  charged  against  his  shop  by  other 
departments. 

A  tabular  blank  should  be  provided  listing  all  the  usual  items 
of  expense,  including  repairs  of  all  kinds,  and  work  done  by  other 
departments  should  be  shown  separately.  Every  week  the  charges 
against  each  item  should  be  inserted  in  the  proper  column,  so  that 
comparison  with  previous  weeks  may  be  easily  made.  A  few 
minutes'  study  of  this  return  will  suffice  to  show  the  foreman  how 
he  stands  on  each  item  under  his  control,  and  whether  he  is  being 
fairly  charged  by  other  departments  with  work  done  for  him. 

Workman's  Efficiency  Record. — The  daily  returns  of  excep- 
tional jobs  and  spoiled  work  will  contain  items  that  go  against 
sundry  workmen.  A  record  should,  therefore,  be  kept  for  each 
man,  to  include  reference  to  all  such  losses,  and  also  his  bonus 
earnings,  late  attendance,  and  other  data  against  him  or  in  his 
favor.  With  properly  designed  methods  such  a  record  can  be 
compiled  at  little  expense,  and  will  be  first-hand  evidence  of  each 
man's  value. 

These  are  the  principal  matters  with  which  the  foreman  is 
concerned,  and  which  he  is  entitled  to  expect  from  any  cost  sys- 
tem that  pretends  to  be  efficient.  He  may  require  more"  than  this 
in  some  shops,  because  the  status  and  duty  of  a  foreman  vary  a 
good  deal,  but  in  few  shops  should  he  be  asked  to  put  up  with  less. 
We  have  now  to  consider  the  viewpoint  of  other  officials. 

What  the  Superintendent  Requires. — The  superintendent's 
viewpoint  is  quite  different  from  that  of  the  foreman.  He  is 
not  so  much  interested  in  details,  but  more  in  broad  results. 
Consequently,  he  does  not  require  such  red-hot  and  up-to-the- 
minute  information  as  the  foreman.  But  he  wants  some  of  it 
day  by  day  also. 

Just  as  the  foreman  is  interested  in  the  cost  of  jobs,  so  the  super- 
intendent is  interested  in  the  cost  of  orders.  An  order  may  be 
defined  as  a  collection  of  individual  jobs  or  components,  such  as  a 
machine,  erected,  or  a  thousand  fittings  which  have  passed 
tlirough  several  departments.  It  is  the  superintendent's  business 
t'  aee  that  orders  are  turned  out  at  an  expected  or  standard  cost 
and  that  they  are  not  being  delayed  in  their  passage  through  the 
plant.  A  proper  system  of  cost  accounts  should  secure  these  two 
kinds  of  information  at  one  and  the  same  time.     As  every  depart- 


THE  NA  T I ' R E  ( )F  h' F.I '( ) R TS  AND  R /•: TURNS      I 0 ! 

mental  job  is  finished,  it  should  appear  on  the  superintendent's 
record  and  thus  vouch  for  itself  as  to  expected  cost  and  expected 
date.  Just  like  the  foreman,  the  superintendent  is  interested 
only  in  the  exceptional  cases,  but  he  is  not  interested  in  the  same 
way.  The  questions  he  will  ask  himself  are :  Is  there  any  serious 
delay  on  any  item  of  this  order?  Is  there  any  serious  or  general 
increase  of  cost  on  this  order? 

Control  of  Orders. — The  superintendent's  control  of  orders 
should  be  based  on  a  "master  schedule"  listing  all  the  different 
components  belonging  to  an  order,  and  against  each  component 
all  the  different  processes  to  be  carried  out  on  it.  A  space  will 
also  provide  for  the  weight  and  cost  of  castings  and  forgings  and 
other  material  against  each  component.  Standard  or  former 
costs  being  stated  against  each  process,  the  general  condition 
of  the  order  as  regards  completion  and  its  general  standing  as 
regards  increase  or  decrease  of  cost,  will  be  visible  from  inspec- 
tion at  any  time,  provided  finished  jobs  are  posted  daily  to  it. 
He  will  also  see  whether  components  are  being  hung  up  for  want 
of  material,  and  whether  material  has  been  issued  in  excess  (as, 
for  example,  in  the  case  of  a  spoiled  part).  As  soon  as  all  the 
spaces  are  rilled  up,  the  cost  of  the  whole  order  will  be  known. 
This  should  be  the  day  after  completion. 

Department  Service  Expenditures. — Apart  from  cost  of  indi- 
vidual orders,  the  superintendent  is  chiefly  interested  in  the  effi- 
ciency of  departments.  It  is  he  who  should  have  a  close  grip  on 
indirect  expense,  and  he  requires,  therefore,  much  more  detail 
than  the  foreman  in  this  respect.  Expense  will  be  of  two  kinds — 
Standing  Orders — the  ordinary  items  arising  from  the  pay-roll, 
small  repairs,  regular  issues  of  stores,  etc.,  and  specially  author- 
ized items  such  as  extensive  repairs  that  are  carried  out  on  special 
Standing  Orders.  All  expense  will  be  classified  according  to  the 
purpose  for  which  expended.  For  example,  all  expenses  relating 
to  buildings  will  be  classed  under  buildings,  all  relating  to  power, 
including  fuel,  wages,  repairs,  etc.,  under  power.  Other  classes 
will  be  handling  of  stores  and  shop  transport  of  materials ;  super- 
vision; organization;  operative  machinery.  This  classification 
will  be  effected  by  the  schedule  of  Standing  Orders  as  explained 
in  Chap.  XII  (Part  II). 

"Exceptional"  Expense  Items. — Each  Standing  Order  item  will 
be  budgeted  or  forecasted,  and  actual  expense  will  be  placed  along- 
side each  item.     Any  departure  from  expected  cost  of  an  item 

26 


402      MANUFACTURING  COSTS  AND  ACCOUNTS 

will  be  called  to  the  superintendent's  attention,  just  as  the  wages 
cost  of  an  exceptional  job  was  called  to  the  foreman's  attention. 
This  will  be  done  each  week,  and  the  items  tabulated  on  a  large 
sheet  carrying  a  series  of  weekly  columns,  so  that  the  tendency 
of  any  item  to  increase  will  come  under  constant  observation. 

Departmental  Efficiency. — Departmental  efficiency  in  various 
directions  will  be  the  principal  remaining  item  to  come  under 
the  notice  of  the  superintendent.  This  may  be  divided  into 
three  classes — (1)  as  to  men,  (2)  as  to  machines,  (3)  as  to 
wastes. 

Information  as  to  the  first  class  is  tabulated  from  the  finished 
jobs  already  scrutinized  by  the  foreman  with  his  indorsement 
of  the  reasons  for  increased  cost.  Jobs  will  be  tabulated  under 
their  reasons,  so  that  the  loss  or  gain  for  each  such  reason  can  be 
reckoned  up  in  a  total.  Each  item  will  be  recorded  on  a  columnar 
statement,  so  that  the  increase  or  decrease  against  each  reason 
<an  be  compared.  Thus,  we  may  have  a  constantly  increasing 
amount  under  the  heading  of  "Job  Interrupted  for  Urgent 
Work,"  which  would  be  unfavorable  and  demand  inquiry,  or  we 
might  have  in  one  department  a  much  higher  ratio  of  increased 
cost  due  to  breakdowns.  Whatever  the  classification,  scrutiny 
is  applied  as  to  increase  or  decrease  of  each  item  in  each  shop, 
and  also  comparison  is  made  as  between  different  shops  each 
week.  When  this  is  done  whatever  unfavorable  conditions  may 
develop  cannot  escape  notice  very  long. 

As  regards  the  second  class,  the  machine-hour  value  of  lost 
time  due  to  idle  machines  is  tabulated  for  each  shop  in  weekly 
columns.  Comparison  of  one  shop  with  another  and  one  week 
with  another  is  easily  made,  and  any  undue  increase  of  this  item, 
not  warranted  by  slackness  of  business,  is  kept  in  view. 

In  the  third  class,  that  of  wastes,  the  superintendent  will  have 
a  record  showing  the  amount  of  spoiled  work  for  each  shop, 
classified  by  reasons.  These  will  also  be  tabulated  in  weekly 
columns,  so  that  different  shops  can  be  compared  together,  and 
each  shop  can  be  observed  from  week  to  week. 

Power-house  efficiency  will  be  the  subject  of  special  technical 
reports,  which,  coupled  with  the  above  segregation  of  all  expendi- 
ture on  the  power  plant  for  whatever  cause,  should  give  a  close 
grip  on  this  item  of  expense. 

Witli  these  returns  made  promptly  each  week,  the  superin- 
tendent will  be  in  a  position  to  turn  the  searchlight  on  any  point 


THE  NATURE  OF  REPORTS  AND  RETl  RNS     403 

of  weakness  that  may  develop,  without  losing  himself  in  detail 
or  trying  to  overlook  everything  at  once. 

What  the  Executive  Wants  to  Know. — The  higher  we  mount 
the  official  ladder,  the  more  general  become  the  data  necessary 
and  the  longer  the  interval  at  which  tabular  statements  are 
required.  The  executive's  interest  in  Cost  accounts,  as  such,  is 
comparatively  small.  His  viewpoint  is  that  of  the  financial 
outlook.  He  wants  to  know  what  is  going  into  the  business  and 
what  is  coming  out.  Generally  speaking,  monthly  returns  will 
provide  all  the  information  he  requires.  Of  course,  all  1  he  sources 
of  detail  information  already  described  are  also  open  to  him. 

The  most  satisfactory  plan  of  control  is  that  of  the  budget. 
This  is,  in  effect,  a  forecast  of  the  main  operations  of  the  business, 
month  by  month,  based  on  previous  experience.  All  principal 
outgoings  such  as  pay-roll,  stores  purchases,  taxes,  insurance  and 
depreciation,  are  listed,  and  their  expected  amount  set  out  in  the 
different  monthly  columns.  Another  set  of  items  is  expected 
balances,  such  as  stores  in  hand,  work  in  process,  cash  on  hand 
and  at  bank,  accounts  owing  by  the  firm  and  to  the  firm;  while 
a  third  set  consists  of  expected  sales  in  each  line  of  goods  manu- 
factured, sales  expense,  including  advertising,  etc.  The  main 
movements  of  cash  in  the  business  are  thus  scheduled,  and 
against  each  item  the  actual  amounts  expended,  received 
or  in  hand  will  be  entered  each  month  for  comparison.  Value 
of  orders  received,  executed,  and  balance  on  hand  is  also  listed. 

Undue  and  unexpected  increases  or  decreases  in  any  item  and 
their  amount  and  significance  are  thus  immediately  seen.  Thus, 
if  the  balance  of  stores  in  hand  or  of  work  in  process  is  rising, 
without  a  corresponding  movement  in  orders  received,  something 
is  wrong.  It  can  be  seen  at  a  glance  if  collections  are  falling 
behind  normal,  if  sales  expense  bears  a  just  proportion  to  results, 
if  any  line  of  product  is  falling  off  in  orders,  or  is  becoming  con- 
gested in  the  shops,  if  indirect  expense  is  increasing,  if  repairs  are 
unusually  high  or  low — in  short  all  the  significant  movements 
of  the  business  are  focussed  and  compared  with  the  experience  of 
previous  years. 

Under  the  head  of  the  executive  department  the  question  of 
estimating  may  be  considered.  As  the  records  already  describe  I 
under  the  heads  of  foreman  and  superintendent  give  the  ultimate 
detail  possible  as  to  every  part  manufactured  and  as  to  every 
machine  or  group  of  articles  made,  the  basis  of  estimating  will 


nil      MANUFACTURING  COSTS  AND  ACCOUNTS 

be  full  and  complete.  The  only  thing  to  be  discussed  is  the 
influence  of  idle  time,  or  half-full  shops,  on  the  cost  of  production 
and,  therefore,  on  the  price  which  should  be  quoted  to  get  new 
business.  This,  however,  is  a  theoretical  matter,  or  one  of  policy, 
and  cannot  be  gone  into  here.  All  the  necessary  data  for  decision 
will,  on  the  other  hand,  be  found  at  hand  in  the  records  provided 
for. 

What  the  Proprietor  Wants  to  Know. — The  proprietor,  or 
whoever  represents  him  in  a  corporate  business,  is  mainly  inter- 
ested in  one  thing — profits.  He  is  also  interested  in  the  condition 
of  his  property,  its  liabilities  and  the  quick  and  fixed  assets  that 
offset  this  liability.  Both  these  wants  arc  fully  met  by  the  pro- 
vision each  month  of  a  full  Balance  Sheet  of  assets  and  liabilities, 
and  a  Profit  and  boss  account.  With  a  system  of  accounting 
designed  to  give  the  information  described,  there  is  no  reason 
why  such  a  Balance  and  Profit  and  Loss  account  should  not  be 
prepared  every  month,  at  no  more  expense  than  the  filling  in  of 
the  figures  on  a  printed  form.  This  is  in  fact  most  desirable,  for 
it  is  the  final  test  of  the  general  accuracy  of  the  returns.  Returns 
that  will  not  balance  do  not  comply  with  the  dictum  of  "safety 
first."  If  the  accounts  are  arranged  properly  as  described  in 
former  chapters,  each  stage  should  be  built  up  in  more  and  more 
general  terms  from  detail  that  was  verified  at  the  beginning.  The 
Balance  Sheet  should  thus  be  the  final  coping  stone  that  com- 
pletes the  edifice  and  makes  its  correctness  visible  to  the  eye. 

In  the  remaining  chapters  some  of  these  arrangements  will  be 
described  in  greater  detail. 


CHAPTER  II 
REPORTS  AND  RETURNS  FOR  THE  FOREMAN 

There  is  probably  more  than  a  grain  of  truth  in  the  suggestion 
that  some  of  the  more  highly  elaborated  modern  systems  would 
never  have  been  invented  if  every  foreman  had  always  been 
provided  with  what  he  wanted  to  know  at  the  time  he  wanted 
to  know  it.  By  whatever  name  he  is  called,  there  must  be  some- 
where a  man  who  is  responsible  for  operative  efficiency,  and  the 
more  this  man  is  in  control  of  the  situation,  the  more  flexible  will 
be  the  adjustment  of  the  shop  to  the  unexpected.  It  is  not  our 
purpose  here  to  discuss  how  far  "planning"  should  go.1  Plan- 
ning is  specifying  in  advance  all  that  can  be  specified,  but  its 
degree  of  development  must  obviously  depend  entirely  on  the 
kind  of  work  that  is  being  done.  But  specifying  in  advance  is 
not  doing  the  work,  though  sometimes  spoken  of  as  if  it  were. 
Someone  has  got  to  see  that  the  work  is  actually  done,  has  got 
to  nurse  and  shepherd  it,  and  this  man  is  called,  for  the  purpose  of 
this  article,  a  foreman.  Now  the  question  is,  What  does  he 
want  to  know,  and  when? 

In  a  previous  chapter  this  question  was  very  briefly  answered. 
In  the  present  chapter  the  methods  necessary  to  provide  the 
information  will  be  described.  There  will  be  no  attempt  to 
describe  a  complete  system  of  Manufacturing  accounts,  but 
only  so  much  of  such  a  system  as  the  foreman  is  concerned  with. 

The  first  step  is  to  provide  for  recording  the  time  of  men  and 
machines  on  work.  There  are  literally  dozens  of  methods  of 
doing  this,  some  of  them  involving  complex  and  expensive 
appliances.  The  problem,  however,  is  simple.  It  is  to  have 
accurate  record  of  the  time  at  which  each  job  was  changed,  and 
to  so  arrange,  first,  that  the  total  hours  accounted  for  check  up 
with  the  gate  time  for  each  man,  and  then,  secondly,  that  the 
verified  details  can  be  rapidly  grouped  in  any  way  desired. 
Further,  the  original  records  should  be  assembled  so  that  they 

1  For  a  discussion  of  planning  and  other  details  of  organization,  see  the 
author's  "Science  and  Practice  of  Management"  (New  York,  1914). 

405 


406      MA  N I  FA  (  TIRING  COSTS  AND  ACCOUNTS 

are  always  available  for  reference.  A  simple  and  effective  plan  is 
given  here,  which  has  worked  well  in  practice,  is  easily  under- 
stood and  possesses  the  advantage  of  quick  results  and  easy 
reference  to  the  original  record  at  any  time. 

Time  on  Jobs.— In  Chaps.  XVIII  and  XIX  (Part  II),  Figs.  84 
and  95,  were  figured  two  varieties  of  Time  Sheet,  one  suitable  for 
Method  B  and  the  other  for  Method  C.  In  the  ensuing  pages  we 
shall  assume  that  Method  C  is  in  use.  Such  Time  Sheets  should 
be  kept  and  filled  out  by  a  job  clerk  in  telephone  communication 
with  the  foremen  and  gang  bosses,  who  give  out  and  pass  on 
jobs  at  the  various  machines.  "Whenever  a  job  is  changed,  the 
order  number- and  other  details  are  telephoned  to  the  clerk, 
who  makes  the  entries,  noting  the  exact  time. 

This  Time  Sheet  is  usually  a  thin  card,  and  each  different 
class  of  operation,  say  turning,  milling,  shaping,  etc.,  has  a 
different  color  appropriated  to  it.  The  card  is  divided  by  thick 
rules,  the  space  between  each  corresponding  to  the  record  of  one 
job.  Such  a  division  is  called  a  "section,"  because  the  card 
is  <-ut  up  into  sections  at  a  certain  stage.  The  smaller  division 
at  the  top  is  called  a  "stub." 

The  ruling  of  each  section  is  a  matter  depending  on  the  nature 
of  the  work.  The  sample  shown  was  used  in  a  plant  making 
heating  apparatus  and  steam  fittings,  thus  including  rather 
heavy  pieces  and  also  small  pieces  in  lots  up  to  a  hundred  in 
each.  In  special  cases  modified  rulings  are  used,  as,  for  ex- 
ample, in  pattern  shops,  core  shops,  foundries,  etc.,  and  for 
laborers. 

Ai  -tailing  work,  a  blank  card  is  appropriated  to  each  man 
and  his  name,  check  number  and  machine  number  are  entered 
on  the  top  Bection,  called  the  "totaling  stub,"  as  this  ultimately 
goes  to  the  pay-roll  clerk.  Then  the  time  of  starting  the  first 
job  is  entered  in  thi  space  "Began,"  also  the  order  number  and 
piece  number,  and  when  necessary  (in  some  shops)  a  brief  descrip- 
tion of  the  work,  such  as  "facing  boss"  or  "drill  and  tap  for 

3crew." 

Winn  the  job  is  finished,  the  job  clerk  enters  the  time  in  the 
"  Finished"  space  and  also  in  the  "Began"  space  of  the  next  sec- 
tion, and  also  the  order  and  piece  number  of  the  next  job.  This 
is  all  he  lias  to  do.  Only  when  the  workman  proceeds  to  a  new 
job  does  be  have  to  make  an  entry,  except  that  at  night  he  enters 
the  time  in  the  "Finished"  -pace  on  the  last  section  used. 


REPORTS  AND  RETURNS  FOR  FOREMAN        t07 

Whoever  passes  the  work  telephones  the  number  of  pieces 
"good"  and  "bad"  to  the  job  clerk,  who  makes  entries  in  the 
space  provided.  This  is  the  signal  that  the  job  is  finished  as  far 
as  that  operation  is  concerned.  Fig.  113  shows  the  condition  of 
the  card  as  it  leaves  the  job  clerk  at  the  end  of  the  day. 

The  next  morning  the  shop  clerk  lakes  the  cards  and  sorts 
them  into  order  of  the  men's  numbers.  He  is  provided  with  two 
series  of  small  rubber  stamps,  one  giving  men's  numbers  and  their 
wage  rates  and  the  other  giving  machine  numbers  and  their 
machine  rates.     These  stamps  are  so  made  that  rates  can  lie 


Machine 

Man's 

Name 

Check  No. 
361 

Mach  No. 
26 

P.W. 

Hra. 

Wages 

Mach. 

Shop  No.l 

A. Williams 

Began 
S.OO 

Order  No. 
1001 

Job 
Turn  Levers 

Good 
3 

Man 

Ilrs. 

Wages 

Mach. 

Fin. 
12.30 

Comp  No. 
7320 

Bad 

1 

Mach. 

Began 
12.30 

Order  No. 
1921 

Job 

Good 
1 

Man 

Hrs. 

Wages 

Mach. 

Fin. 
6.00 

Comp  No. 
82  63 

Bad 

Mach. 

Items  in  Bold  Face  Type  are  those  Inserted  by  the  Job  Clerk 

Fig.  113. — Time  Card  as  filled  out  by  job  clerk. 


changed  when  necessary  without  destroying  the  stamp.  Each 
stamp  frame  has  a  pad  of  different  ink,  say  red  for  men  and  green 
for  machines.     They  give  impressions  thus : 


361— 25c. 


L26— 20c. 


reading  "Man  number  361,  hourly  rate  25  cents"  and  "Lathe 
number  26,  hourly  rate  20  cents."  They  are  so  arranged  in  the 
holding  frame  that  the  figures  can  be  read  on  the  wood  lops  like 
lines  of  print,  so  that  any  number  can  be  picked  out  unhesi- 
tatingly. 

The  clerk  takes  the  first  card,  picks  out  the  man's  stamp  cor- 
responding, and  stamps  the  impression,  first  on  the  totaling  stub 
and  then  on  all  the  other  sections  that  have  entries  on  them. 
This  operation  is  then  repeated  for  the  machine  concerned. 
Both  these  operations  take  place  more  quickly  than  they  can  be 
described.  Verification  is  by  observing  that  the  impressions  on 
the  totaling  stub  correspond  with  what  the  job  clerk  has  written 


108       MANUFACTURING  COSTS  AND  ACCOUNTS 

there.  We  are  then  sure  that  all  the  other  sections  on  that  card 
have  proper  rates  on  them. 

Checking  Up  with  the  Total  Time. — The  next  step  is  to  make 
sure  thai  the  tale  of  work  as  shown  by  the  Time  Card  does  really 
correspond  with  the  time  the  man  has  actually  been  at  work  as 
shown  by  the  gate  time.  Here  again  there  are  all  kinds  of  elab- 
orate arrangements  that  may  be  used  to  ascertain  gate  time.  We 
cannot  discuss  this  question  here.  Whatever  system  is  used 
should  be  able  to  do  one  thing,  namely,  to  permit  the  gatekeeper, 
as  soon  as  the  last  man  has  passed  the  gate,  to  prepare  without 
delay  a  list  of  men  and  the  total  hours  they  have  worked.  The 
list ,  of  course,  may  be  printed  and  the  time  rapidly  rilled  in  by  the 
pen.  The  main  thing  is  to  have  it  done  swiftly  and  accurately  the 
same  night,  so  that  a  list  is  ready  for  each  shop  clerk  early  next 
morning,  covering  all  his  men.  The  same  list  may  be  made  to 
last  a  week  or  longer,  as  it  is  free  long  before  the  end  of  the 
working  day  and  may  be  returned  to  the  gateman. 

The  shop  clerk  takes  his  Time  Cards,  which  are  already  in 
order  of  men's  numbers,  one  at  a  time,  adds  the  hours  shown 
by  the  sections,  and  places  the  total  on  the  totaling  stub.  Then 
he  compares  the  total  thus  shown,  with  the  gate  time  as  shown 
by  the  gateman's  list.  If  there  is  any  discrepancy,  he  goes  into 
the  shop  and  interviews  the  offender  there  and  then.  On  first 
putting  such  a  system  into  work,  many  discrepancies  will  be 
found,  but  patience  and  perseverance  will  soon  improve  matters, 
and  the  men  will  gel  to  be  careful  about  odd  quarters,  usually 
due  to  coming  late,  that  they  have  missed  reporting  to  their 
foreman  or  gang  boss,  when  he  telephoned  the  time  of  com- 
mencing the  firsl  job  to  the  job  clerk. 

When  this  is  all  done,  we  are  sure  that  our  job  time  is  correct, 
and  the  troubles  of  that  day  are  behind  us,  as  far  as  time  is 
concerned. 

Totaling  the  Stubs.  The  next  step  is  to  extend  the  wages  and 
machine  earnings  on  each  section  and  on  the  totaling  stub.  This 
ifl  best  'lone  by  means  of  a  "ready  reckoner,"  (see  Fig.  51)  which 
should  be  a  small  book  simply  giving  a  separate  hourly  rate  on 
each  page  and  a  series  of  figures  representing  the  value  of  any 
number  of  hours  and  quarters  up  to  the  highest  likely  to  be 
worked  in  one  day.  If  higher  rates  are  paid  for  overtime,  a 
separate  column  can  contain  these  figures  also.  One  reading 
for  each  job  should  be  all  that  is  necessary.     Such  books  can  be 


REPORTS  AND  RETURNS  FOR  FOREMAN        U)9 

easily  made  up  by  the  drafting  room  and  blue-printed.  I  do 
not  know  of  any  really  compact  or  simple  book  of  the  kind  on 
the  market.  There  are  many  full  of  unnecessary  elaboration 
and  of  inconvenient  dimensions. 

Having  extended  all  the  sections  on  a  card,  the  next  step  is  to 
verify  the  total  by  adding  up  the  working  sections  on  an  adding 
machine  and  seeing  that  they  agree  to  a  cent  with  the  total  on 
the  totaling  stub.  Usually  they  will  be  a  cent  or  so  out,  due  to 
quarter-  or  half-hours.  One  of  the  sections  must  be  altered  so 
that  the  total  of  all-job-timc  agrees  with  pay-roll  earnings  and 
machine  earnings  on  the  totaling  stub.     This  is  important,  so 


Machine 

Man's 
A.Wil 

Name     Check  No. 
liams          361 

Mach  No. 
26 

P.W. 

361.25c- 

Hrs 

Wages 
2.25 

Mach. 
1.S0 

Shop  No.l 

L26-20C 

9 

Began 
S.OO 

Order  No. 
1061 

Job 
Turn  licvers 

Good 

1 

P.W. 
V 

Man 
361-25c 

Hrs. 

Wages 
1.12 

Mach. 
90 

Fin. 
12.30 

Comp  No. 
7320 

Bad 

Mach. 
L26-20c 

Began 
12.30 

Order  No. 
1921 

Job 
Turn  Fin 

Good 
3 

V 

Man 
361-25c 

Hrs. 
4H 

Wages 
1.13 

Mach. 
90 

Fin. 
6.00 

Comp  No. 
8263 

Bad 

1 

Mach. 
L26-20c 

Note   that  the  Odd  Cent  in  Wages  has  been  Adjusted  on  the  Lower  Job 
Fig.   114. — Time  Card  with  all  entries  complete. 


that  absolute  balance  can  be  obtained  in  the  accounts  later. 
When  this  is  done  we  are  sure  that  job  time  is  locked  into  gate 
time  and  into  pay-roll  (see  Fig.  114). 

Record  of  Machine  Time. — Before  slicing  up  the  Time  (aids 
into  sections  it  is  usually  convenient  to  take  off  the  machine 
time  and  tabulate  it.  A  printed  list  of  all  machines  in  the  shop, 
with  their  normal  days  work  and  earnings  is  provided  thus: 


Mach.  No. 
181 


Kind 
36"  Mill 


Rate 
15 


Full  Hours 
10 


Earnings 
1.50 


Columns  are  provided  for  each  day,  in  which  the  actual  hours 
and  earnings  for  each  machine  are  entered.  Each  day's  hours 
and  earnings  are  totalled  and  compared  with  standard  hours  and 
earnings,  showing  loss  due  to  idle  machines.  The  individual 
machines  at  fault  can  be  indicated  by  a  tick  at  the  time  of  making 


mi      MANUFAi  TURING  COSTS  AND  ACCOUNTS 


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the  entry.  The  figures  for 
entering  are  taken  from  the 
totaling  stubs  where  they  are 
already  summarized  (see  Fig. 
115). 

Grouping  the  Details. — We 
are  now  ready  to  consider 
how  the  details  of  jobs,  which 
are  contained  on  the  sections 
giving  hours,  wages  and  ma- 
chine charges  on  each  job, 
shall  be  most  conveniently 
grouped  together,  so  that  all 
the  work  on  one  piece  or 
group  of  pieces  and  all  the 
work  on  various  expense  jobs 
or  services  may  meet  together. 
The  quickest  way  of  doing 
this  is  by  dissecting  the  Time 
Cards  and  sorting  the  sec- 
tions according  to  their  Pro- 
duction Order  numbers,  or 
Standing  Order  numbers  in 
the  case  of  expense  work. 
This  is  rapidly  done  by  a 
paper  cutter  with  a  suitable 
guard.  The  Time  Cards  are 
sliced  up  into  sections,  and 
then  these  sections  are  sorted 
in  properly  designed  trays,  first 
to  thousands,  then  to  hun- 
dreds and  later  to  tens  and 
units.  The  totaling  stubs 
are  sorted  out  at  the  first  sort, 
and  handed  to  the  pay-roll 
clerk  or  department,  along 
with  the  gate  time  report, 
which  is  returned  to  the  gate- 
man  after  checking  with  the 
stubs.  We  do  not  need  to 
follow  these  stubs  further. 


REPORTS  AND  RETURNS  FOR  FOREMAN        111 

All  yesterday's  work  of  the  shop  is  now  sorted  into  Production 
Order  numbers,  and  Standing  Order  numbers.  Each  component 
will  be  represented  by  from  one  to  four  or  five  sections.  Each 
Standing  Order  will  be  represented  in  the  Bame  way.  How 
shall  the  information  therein  contained,  which  is  not  only  veri- 
fied information,  but  also  information  in  the  ultimate  detail, 
be  made  available  for  reference? 

Summary  of  Wages. — The  first  step  is  to  add,  with  a  machine, 
all  the  sections  bearing  work  order  numbers  and  enter  their  total 


Dent. 

Week     Enrlino-                               19 

Item 

Thr. 

Fri. 

Sat. 

Sun. 

Mon. 

Tue. 

Wed. 

Week 
Total 

Productive  Wages: 

Wages,  Ordinary 

Wages,  Overtime 

Bonuses 

Total  Productive 

Expense  Wages: 

Building  Repairs 

"         Cleaning 

"          Sundry 

Power  Equipment  Repairs 

Oiling 

Cranes,  etc.,  Repairs 

»         "       Operating 

Supervision 

Organization  (  Clerks  ) 

Machines,  Repairs 

To  Other  Departments 

Total  Expense 

Total  Payroll 

Fig.  116. — Daily  record  of  wages  expended  in  shop. 
Note. — The  classification  of  Expense  Wages  will  follow  the  schedule  of 
Standing  Orders. 

opposite  the  lines  on  the  blank  Fig.  116;  namely,  productive 
wages,  ordinary  and  overtime  respectively.  Sections  reporting 
bonuses  earned,  which  come  from  another  source  to  be  mentioned 
presently,  are  also  added  together  and  entered.  These  three 
items  form  the  total  of  productive  wages  for  the  day. 

Next,  the  sections  bearing  Standing  Orders  are  added,  each 
order  number  separately,  and  the  result  is  entered  opposite  the 
proper  line,  such  as  "cleaning  buildings,"  "repairing  machines." 


412      MANUFACTURING  COSTS  AND  ACCOUNTS 

The  examples  given  will,  of  course,  be  varied  according  to  the 
actual  shop  wants  and  will  follow  the  Standing  Order  system  in 
use.  Amounts  charged  to  other  shops  will  be  entered  in  one 
sum  on  this  report  each  day.  The  total  of  expense  items  being 
added,  the  grand  total  will  represent  total  pay-roll  for  the  day. 

Watching  this  simple  report  daily  will  give  the  foreman  the 
closest  grip  on  every  cent  of  expense  wages  in  his  shop.  Daily 
familiarity  will  enable  him  to  tell  at  a  glance  whether  any  in- 
crease in  any  item  is  legitimate  or  not.  Such  expense  is  thus 
closely  controlled  at  its  source. 

Watching  the  Cost  of  Jobs. — The  next  matter  for  attention  is 
the  disposal  of  the  sections  which  refer  to  productive  work. 
We  know  their  total,  but  not  their  detail.  Being  already  sorted 
into  Product  ion  ( >rder  numbers,  we  take  each  set  of  sections,  and 
sort  them  into  their  Component  Order  numbers.  Each  Produc- 
tion Order  may  have,  say,  three  or  four  components  being  worked 
on  at  one  time  in  the  shop. 

Each  such  component  has  a  Cost  Sheet  arranged  as  shown  by 
Fig.  117.  It  is  made  large  enough  to  allow  of  the  time  sections 
being  pasted  on  to  it,  thus  avoiding  the  loss  of  time  and  danger  of 
inaccuracy  arising  from  posting  or  copying.  As  each  process  or 
operation  is  distinguishable  by  the  color  of  the  card,  they  can  be 
pasted  on  in  any  order  as  they  come  in  day  by  day.  When  any 
process  is  completed  as  indicated  by  the  number  of  pieces  appear- 
ing on  a  section,  the  sections  for  that  process  are  summarized 
on  a  machine  and  their  total  entered  in  the  oblong  space  at  top 
left  hand  of  the  Cost  Sheet.  In  the  case  of  standardized  work 
this  space  will  already  have  been  tilled  out  by  the  production 
department  with  a  list  of  operations  and  their  expected  or  stand- 
ard cost.  <  lonsequently  as  each  process  or  operation  is  com- 
pleted, it  will  be  seen  at  once  if  the  formen's  attention  is 
necessary,  and  whether  it  ranks  as  an  "exceptional"  job  or  not. 

All  the  Bections  are  thus  rapidly  disposed  of  by  pasting  on 
their  proper  leaves.  Each  leaf  is  thus  accumulating  the  history 
of  the  piece  exactly  as  it  was  actually  worked  on.  Every  inci- 
dent is  reflected.  If  the  job  was  interrupted,  if  part  of  it  was 
worked  overtime,  if  men  were  changed  while  it  was  on  the 
machine,  if  some  was  done  at  one  time  and  some  at  another,  if 
the  man  failed  to  earn  a  bonus,  or  if,  on  the  contrary,  the  job 
wenl  through  promptly  and  smoothly — the  whole  story  can  be 
read  from  a  simple  inspection  of  the  pasted  sections,  without  a 


REPORTS  AND  RETURNS  FOR  FOREMA  V         n:; 


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414      MANUFACTURING  COSTS  AND  ACCOUNTS 

particle  of  additional  clerical  work  or  any  delay.  Moreover,  it 
is  not  only  there,  but  it  is  there  for  all  time.  Ten  years  hence,  if 
required,  it  will  be  easy  to  refer  back  and  see  what  man  drilled 
a  particular  hole  and  what  it  cost  for  him  to  do  it. 

We  have  shown  in  considerable  detail  the  steps  up  to  this  point, 
in  order  to  emphasize  the  fact  that  the  proper  place  to  elaborate 
detail  is  at  the  starting  point,  in  the  shop,  where  alone  detail 
i-  a  matter  of  daily  bread  and  possesses  a  live  significance  wholly 
missing  at  either  a  later  stage  or  at  a  later  date.  Detail  must  be 
piping-hot,  or  it  is  of  slender  value.  The  people  who  make  the 
detail  arc  the  people  who  can  use  the  detail. 

Bringing  the  Detail  into  Line. — The  way  in  which  this  detail 
is  brought  into  line  with  the  rest  of  the  system  must  now  be 
briefly  discussed.  As  soon  as  a  job  is  finished,  if  it  is  a  bonus 
job,  the  bonus  earned  is  worked  out  on  the  job  order  given  to  the 


Department          Date                               19 

Prod. 
Order  No 

Comp. 
Order  No 

Wages    Cost 

V 

Reason 

Actual 

Standard 

Total  for  Day 

Fig.  118. — Daily  return  of  wa^os  cost  of  finished  operations  compared 
with  standard  cost.  The  mark  (-y/)  is  placed  against  items  requiring  fore- 
man'e  scrutiny. 

man  (see  Fig.  64),  and  summarized  on  a  stub  at  the  foot  of  the 
order.  This  stub  is  thou  detached,  credited  to  the  man  in  his 
booi  (see  Figs.  85  and  86),  and  passed  to  the  shop  clerk  to  be 
included  among  his  soot  ions,  as  mentioned.  It  thus  finds  its 
way  both  to  the  pay-roll  and  to  the  Cost-Sheet. 

Exceptional  Jobs.- — When  a  process  or  operation  is  finished, 
notified  by  receipt  of  the  bonus  stub  or,  if  daywork,  by  the 


REPORTS  AND  RETURNS  FOR  FOREMAN       415 

"good"  and  "bad"  entries  mentioned,  the  shop  clerk,  after  all 
his  sections  have  been  pasted  up,  proceeds  to  add  the  sections 
of  such  finished  operations,  so  as  to  find  its  cost.  This  i 
with  the  standard  or  expected  cost,  is  then  entered  on  an 
Operations  Cost  Return  (Fig.  118).  A  mark  is  made  against 
all  such  jobs  as  have  cost  more  than  standard  (or  more  than 
an  agreed  percentage  of  standard),  and  these  are  examined  by 
the  foreman,  who  puts  his  reason  against  them.  An  examination 
of  the  pasted  sections  will  frequently  explain  the  reason,  such 
as  "interrupted  job"  or"overtime."  In  other  cases  the  defaulter 
may  be  interviewed  for  an  explanation.  Anyway,  the  hue- 
man's  attention  is  called  promptly  to  all  cases  of  increased  cost 
and  to  these  only. 


Dent. 

Week 

Endin? 

19 

Item 

Thr. 

Fri. 

Sat. 

Sun. 

Mon. 

Tues. 

Wed. 

Total 

Productive  Wages 

Wages  on  Fin.  Jobs 

Still  in  Shop 

Fig.  119. — Daily  record  of  balance  of  work  on  hand. 

Balance  of  Work  in  Hand. — The  total  of  finished  jobs  at 
actual  cost  is  also  used  as  explained  in  the  last  article  to  give 
the  foreman  daily  information  as  to  the  balance  of  work  in  hand 
in  his  shop.  This  is  done  by  the  shop  clerk  by  taking  yester- 
day's balance,  adding  today's  productive  wages  and  deducting 
finished  jobs.  This  gives  the  new  balance  to  be  carried  forward 
to  next  day.  A  columnar  sheet  makes  each  day's  figures  com- 
parable with  the  preceding  days  (see  Fig.  119). 

Each  day  the  total  loss  on  jobs  (those  that  are  checked  on 
Fig.  118)  is  classified  and  summarized  under  the  various  reasons 
for  the  loss.     Fig.  120  shows  the  ruling  for  this  blank. 

Spoiled  Work. — Another  byproduct  of  the  sections  is  the 
matter  of  spoiled  work.  The  number  of  parts  good  and  bad  are 
disclosed  by  the  pasted  sections,  and  when  the  job  is  being  com  i  <  I 
these  are  summarized  on  the  duplicate  stub.  They  are  also 
listed  on  a  special  blank  for  the  foreman's  investigation  and  note 


416      MANUFACTURING  COSTS  AND  ACCOUNTS 

as  to  reasons.     These  reasons  are  tabulated  as  described  in  the 
last  chapter  on  a  form  similar  to  Fig.  120. 

Workman's  Record. — Figure  121  illustrates  a  blank  on  which 
is  recorded  the  nature  and  amount  of  loss  on  orders  considered  to 
be  the  fault  of  the  workman.  This  may  be  combined  on  one 
card  with  a  record  of  late  attendance,  bonus  earnings,  etc.,  if 
desired. 


Dent. 

WppL-   Fnctincr 

19 

Reason 

Thur. 

Fri. 

Sat. 

Sun. 

Mon. 

Tues. 

Wed. 

Total 

Fig.  120. — Daily  return  of  loss  on  "Exceptional  Jobs."  The  various 
causes  are  listed  in  the  first  column.  A  similar  blank  is  used  for  recording 
loss  on  spoiled  work. 


Man's  Name. 


.N'o. 


.Dept. 


Date 


Order 
No. 


Nature  of 
Loss 


Spoiled 
Work 


Other 
Losses 


Total 


1  p..    121. — Record  of  losses  adjudged  to  be  caused  by  fault  of  workman. 

This  is  necessarily  a  description  of  the  method  of  cost- 
ing by  sections,  but  anyone  familiar  with  cost  will  see  how 
it  can  ho  modified  and  extended.  It  may  be  mentioned  that  in 
some  case-  the  material  issues  (which  are  made  on  suitably  ruled 


REPORTS  AND  RETURNS  FOR  FOREMA  V        117 

sections  and  cut  up  and  sorted  to  numbers  after  they  have  been 
priced  out  and  the  day's  total  of  issues  taken  off)  are  pasted  on 
the  Cost  Sheet  corresponding  to  the  component  which  the 
material  is  for.  In  other  cases  the  material  sections  are  entered 
on  a  separate  Material  Cost  Sheet  and  have  nothing  to  do  with 
any  shop  or  department.  This  depends  on  the  nature  of  the 
work. 

The  method  of  advising  each  foreman  of  the  cost  of  work  done 
by  the  repair  department  or  other  shops  is  sufficiently  obvious 
not  to  need  description. 

Many  details  not  given  here  will  be  filled  in  readily  by  those 
familiar  with  previous  chapters  of  this  book.  The  control  attain- 
able over  idle  machines,  over  spoiled  work,  and  over  the  regular 
progress  of  jobs  will  be  easily  understood,  but  that  over  replace- 
ments, urgent  lots  and  delayed  work  will  be  understood  if  the 
central  fact  that  the  whole  history  of  each  job  as  it  occurred  and 
as  it  is  occurring  appears  on  the  Cost  Sheet  of  each  order.  We 
have  only  to  pick  this  up  to  know  all  about  the  order  and  its 
present  position,  and  to  answer  any  possible  question  about  it 
that  is  within  the  purview  of  the  shop.  I  do  not  know  of  any 
other  method  that  answers  queries  so  minutely,  and  at  the  same 
time  so  authoritatively,  as  this. 


27 


CHAPTER  III 
REPORTS  AND  RETURNS  FOR  THE  SUPERINTENDENT 

An  important  part  of  the  superintendent's  duties  is  to  insure 
that  the  work  is  carried  through  the  various  departments  in  due 
sequence  and  with  regard  to  the  time  schedule.  Closely  con- 
nected with  this  is  the  question  of  material,  of  new  parts  that  have 
to  he  ordered  and  made  to  replace  those  spoiled  at  some  stage  of 
the  work.  The  routine  supervision  of  these  matters  will  usually 
be  delegated  to  a  production  clerk. 

<  lontrol  over  the  progress  of  work  is  attained  by  means  of 
master  schedules,  which  are  sheets  on  which  are  listed  all  the 
parts  or  components  in  an  order,  and  all  the  departments  working 
on  each  component,  arranged  in  the  sequence  in  which  the  work 
of  the  departments  is  to  be  carried  out.' 

The  arrangement  of  schedules  will  differ  with  the  nature  of 
the  work.  They  can  be  made  to  control  either  the  sequence  of 
work  alone  or  to  keep  such  matters  as  variation  from  standard 
cost,  delays  and  replacements  also  in  view.  Fig.  122  represents 
a  portion  of  a  sequence-control  schedule  used  in  an  English  plant 
about  17  years  ago.  As  each  operation  was  reported  finished  the 
symbol  representing  that  operation  was  blotted  out  by  a  rubber 
stamp.  A  glance  at  the  schedule  was  sufficient  to  show  whether 
operations  were  being  carried  out  regularly.  Each  schedule 
represented  an  order  for  one  machine,  and  being  mounted  on 
separate  carriers,  the  different  orders  on  hand  could  be  arranged 
according  to  due  dates.  In  this  way  a  rather  good  control  over 
time  sequence  was  obtained,  especially  considering  the  very 
simple  form  of  the  schedule. 

A  more  complete  master  schedule  is  shown  in  Fig.  123.  This 
doea  not  record  processes  within  departments,  but  the  complete 
work  of  each  shop  on  each  component.  The  information  is 
derived  from  the  Component  Cost  Sheets  (Fig.  117)  described 
in  ili<-  lasl  chapter,  which  are  sent  in  to  the  superintendent  by 
each  department  as  soon  as  completed,  but  after  entry  on  the 
Departmental   Manufacturing  .Journal  and  Departmental  Fin- 

418 


REPOR  TS  A  ND  R E T  URNS  FOR  S  UP  E  RINT  E  VDENT     U9 


For 

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on  long  strips  and  attached  to  swinging  boards  so  that  the  ordera  could 
be  arranged  in  any  desired  series.  P  =  Pattern  ordered.  F  =  Senl  to 
foundry.  M  =  Casting  received.  The  other  symbols  refer  to  machine 
operations.  The  circle  is  a  rubber  stamp  impression  showing  that  the  stage 
in  question  has  been  passed. 


420      MANUFACTURING  COSTS  AND  ACCOUNTS 


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422      MANUFACTURING  COSTS  AND  ACCOUNTS 

ished  Orders  Journal,  as  described  in  Chap.  XIX  (Part  II). 
Information  as  to  the  material  is  obtained  from  Material  Cost 
Sheets  in  most  eases  but  as  previously  explained,  material  is 
sometimes  recorded  on  Departmental  Component  Cost  Sheets. 

Use  of  the  Master  Schedule. — The  blank  schedule  contains  the 
names  and  Component  Order  numbers  of  all  components,  and 
against  each  is  stated  the  departments  which  have  to  do  work 
on  them  and  also  the  date  at  which  each  stage  should  be  com- 
pleted. Against  each  department  the  standard  cost  of  the  labor 
in  that  department  is  also  given.  Then  the  Cost  Sheets  are 
entered  up  daily  as  received,  so  as  to  show  the  weight  and  cost  of 
material,  the  actual  labor  cost,  the  difference  between  actual  and 
standard  cost,  the  delay  in  days,  if  any,  the  number  of  parts  good, 
the  reference  to  the  Replacement  Order,  if  any,  and  the  cumula- 
tive cost  to  date. 

Inspection  of  the  schedule  at  any  moment  will  show  the  con- 
dition of  the  order  as  regards  completion,  the  degree  of  delay 
already  incurred,  the  extent  to  which  the  cost  is  coming  out  as 
expected  with  reference  to  standard,  and  the  cost  to  date  of  all 
finished  parts  on  the  order. 

As  far  as  the  superintendent  is  concerned  the  principle  of  ex- 
ceptions applies  to  the  work  of  controlling  orders.  As  long  as  the 
different  Departmental  Cost  Sheets  come  through  without  undue 
delay,  and  as  long  as  no  important  increase  of  actual  as  compared 
with  standard  cost  occurs,  the  superintendent's  attention  does 
not  need  to  be  called  to  the  schedule.  But  if  anything  shows  a 
tendency  to  go  persistently  wrong,  then  he  is  warned  and  can 
make  inquiry  in  the  proper  quarter.  The  degree  of  increase  of 
cost  and  of  delay  that  needs  to  be  brought  to  his  attention  is,  of 
course,  a  matter  of  experience  in  each  plant,  and  may  vary  from 
time  to  time  also  according  to  known  conditions.  Where  all 
orders  arc  behind,  and  well  known  to  be  so,  then  only  extra-bad 
delays  will  be  reported.  The  general  idea  will  be  quite  clear 
after  a  little  study  of  the  makeup  of  the  schedule,  as  shown  in 
Fig.  123. 

Some  explanation  may  be  needful  as  to  the  use  of  the  columns 
on  the  righ.1  hand  of  the  blank  headed  "Cumulative  Check  Post- 
ings." Only  one  line  per  day  is  used,  and  that  only  when  a  Cost 
Sheci  orCosI  ShcOs  have  been  received  for  entry.  The  first  day 
the  whole  of  the  completed  Cost  Sheets  pertaining  to,  say,  Pro- 
duction Order  9,163  are  totalled,  as  regards  the  different  items — 


REPORTS  AND  RETl  rRNS  FOR  SI  PERI  \  7  /•  \  hi  \  /      |_<:; 

material,  wages,  etc. — and  entered  on  the  first  line.  The  nexl 
day  the  same  process  is  gone  through,  1ml  instead  of  entering  t  he 
day's  figures  at  once  on  line  2,  they  are  firsl  added  to  the  figures 
on  the  previous  day's  line,  thus  making  cumulative  totals,  or 
totals  to  date,  for  each  column  of  cost  data.  Consequently,  a 
glance  at  the  sheet  will  (ell  us  at  any  lime  what  is  the  total  ex- 
penditure on  finished  parts  for  that  Production  Order.  In  the 
instance  shown,  $1.55  had  been  expended  on  the  first  day,  $2.  in 
at  the  end  of  the  second  day,  and  $13.36  up  to  the  end  of  the  third 
day.  For  labor  only,  these  totals  are  $0.65,  $1.20  and  $6.53  re- 
spectively, and  so  with  the  other  columns.  When  the  order  is 
completed,  the  totals  of  columns  on  the  left  hand  of  the  schedule 
must  agree  with  the  totals  of  the  cumulative1  check  postings  on 
the  right  hand,  thus  providing  a  proof  of  the  accuracy  of  t  he  work. 

On  completion  of  all  the  parts  or  components  shown  on  the 
schedule,  the  Production  Order  is  complete  and  the  figures  give 
the  total  cost  of  the  order,  as  well  as  a  detailed  record  of  t  he  cosl 
of  each  part.  Comparison  of  the  totals  of  the  "standard-cost  " 
column  with  the  "labor-cost"  column  will  disclose  how  far  the 
order  as  a  whole  has  come  up  to  expectations.  If  further  investi- 
gation is  desired,  the  individual  departments  at  fault  will  he  indi- 
cated by  the  loss  and  gain  columns.  If  then  any  particular 
department  shows  up  badly,  the  fullest  detail  as  to  what  happened 
will  be  found  in  the  Departmental  Cost  Sheets,  which,  as  shown 
in  the  last  chapter,  contain  a  detailed  history  of  the  work,  as 
shown  by  the  original  documents  pasted  on  if . 

The  Cost  "Album." — These  Cost  Sheets,  when  the  whole  order 
is  completed,  are  then  bound  into  book  form,  and  the  master 
schedule  also  folded  and  bound  in  with  them.  This  collection 
of  documents  may  be  supplemented  in  some  cases  by  other  official 
papers,  such  as  the  report  of  the  testing  department  on  the  per- 
formance of  the  machine  before  delivery.  The  front  cover  of  this 
"Album"  is  a  printed  blank  like  Fig.  124  which  summarizes  all 
the  cost  data,  and  also  provides  space  for  entries  interesting  to 
the  next  higher  authority,  viz.,  the  executive. 

Separate  master  schedules,  appropriately  ruled,  are  provided 
for  patterns,  tools  and  replacements  in  connection  with  each 
Production  Order.  The  expenditure  on  these  three  heads  is  sum- 
marized on  the  album  cover,  the  Cost  Sheets  being  withdrawn 
from  the  current  file  when  the  main  Production  Order  is  com- 
pleted.    In  a  few  cases  patterns  and  tools  are  chargeable  to  cus- 


424      MA  X I  FA  CTl  RIXC  COSTS  A  XD  ACCOUNTS 


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tomer,  but  whether  they  are  or  not, 
these  costs  are  always  entered  as 
memoranda  on  the  cover,  and  are 
charged  to  their  proper  accounts  at 
a  later  stage.  The  importance  of 
recording  such  cost  figures  in  con- 
junction with  the  cost  of  the  order 
itself  will  1)0  readily  understood. 

A>  each  album  cover  is  filled  out, 
the  data  as  to  cost  of  the  main  order, 
and  the  patterns,  tools  and  spoiled 
work  in  connection  with  it,  are  en- 
tered on  a  Finished  Order  list  (shown 
in  Fig.  125),  which  is  sent  weekly  to 
the  executive.  It  summarizes,  of 
course,  by  classes  the  exact  value  at 
si  top  cost  of  all  finished  orders,  to 
which  is  added  the  supplementary 
rate  representing  wasted  burden  not 
absorbed  by  working  machines. 
The  difference  between  expected  or 
standard  and  actual  cost  is  entered  in 
one  of  the  columns  on  the  left  of  the 
blank. 

Weekly  Reports  on  Shop  Efficien- 
cies.— Having  thus  acquired  a  close 
control  over  the  run  of  orders  and 
their  components  through  the  de- 
partments and  a  detailed  knowledge 
of  their  expected  and  actual  cost, 
the  superintendent  will  require 
figures  to  show  him  how  the  shops 
are  gel  ting  on  in  the  matter  of  cer- 
tain kinds  of  efficiencies.  These  are 
afforded  by  what  may  be  termed 
"reason  registers."  Their  general 
ruling  is  shown  by  Fig.  126. 

One  of  these  blanks  is  devoted  to 
"exceptional  jobs"  and  one  to 
"spoiled  work."  The  information 
is  derived  from  the  weekly  totals  of 


REPORTS  AND  RETURNS  I ?i  )R  SUPERINTENDEN1      127 

the  corresponding  shop  records  (Fig.  120)  in  the  case  of 
exceptional  jobs,  hut  in  the  case  of  spoiled  work  it  will  be 
necessary  to  take  into  account  the  total  loss  incurred  in  the  chain 


SPOILED  WOKK  RETURN 

1 

'    MONTH 

L    i9 

Dcpt 
Chargeable 

Reason 

W.H. 

W.I 

E. 

Total 

For  Monti 

Oept.  Total                               j    \ 

Dept.  Total 

/ 

'IXULATION 

RECAI 

Reason 

W.E. 

\v 

u. 

Total 

For   .Monti: 

\ 

Total  all  Spoiled  Wk. 

Fig.  126. — Weekly  and  monthly  return  of  spoiled  work  by  causes.  Re- 
capitulation of  same  by  causes  for  whole  plant.  A  similar  blank  is  used  for 
"Exceptional  Jobs." 

of  production.  The  reports  (Fig.  120)  deal  only  with  the  loss 
incurred  in  a  particular  department,  but  as  work  may  have  been 
done  by  other  departments  on  the  piece,  and  as  in  any  case  there 
is  the  loss  of  material  to  be  taken  into  account,  it  will  be  neces- 


428      MANUFACTURING  COSTS  AND  ACCOUNTS 

sary  to  compile  the  superintendent's  account  of  loss  on  spoiled 
work  from  other  sources.  Moreover,  the  loss  incurred  in  any- 
particular  department  is  not  the  significant  matter  from  the  super- 
intendent's viewpoint;  what  he  is  concerned  with  is  the  amount 
chargeable  against  a  department  for  spoilage,  wherever  incurred. 
Thus,  if  a  piece  has  gone  through  several  departments,  and  then 
is  wasted  owing  to  a  faulty  casting,  the  cost  of  the  whole  piece 
up  to  that  point  required  to  be  accumulated  and  exhibited  as  a 
loss  against  the  foundry. 

Where  Replacement  Orders  are  in  use,  as  they  will  be  in  all 
machine  shops  and  engineering  works,  these  will  form  the  best 
source  for  data  to  be  entered  on  the  superintendent's  return. 
It  will  also  be  remembered  that  the  cost  of  such  orders  is  entered 
in  a  special  column  in  the  Department  Manufacturing  Journal 
(Fig.  96).  Consequently  we  have  here  a  precise  check  on  the 
figures  in  the  return  at  the  month  end.  If,  therefore,  as  each 
replacement  order  is  completed,  the  data  are  entered  on  a  blank 
like  Fig.  126  the  total  for  the  month  of  all  spoiled  work  must 
equal  the  total  charge  to  Spoiled  Work  account  from  the  Depart- 
mental Manufacturing  Journals.  This  blank  in  fact  provides 
the  authority  for  the  distribution  of  that  balance  to  the  depart- 
ments at  fault. 

The  comparative  performance  of  the  different  departments 
from  week  to  week  can  thus  be  very  clearly  grasped.  In  the 
case  of  "exceptional  jobs"  the  reasons  assigned  may  be  very 
instructive.  It  may  be  found  that  a  particular  shop  is  running 
high  on  account  of  "interrupted  jobs"  or  "man's  fault,"  or 
"  too  much  metal."  Even  if  these  reasons  prove  to  be  the  wrong 
ones,  the  attention  of  the  superintendent  will  be  immediately 
directed  toward  conditions  that  want  altering.  Similarly,  a 
general  tendency  to  attribute  spoilage  to  "bad  castings"  will 
lead  t<»  prompt  inquiry  and  thorough  threshing  out  of  the  situa- 
tion. If  returns  like  this  are  made  weekly,  so  that  the  figures  of 
all  exceptional  jobs  and  all  losses  due  to  spoilage  are  brought 
right  under  the  notice  of  the  superintendent,  in  such  a  form  as  to 
be  comparable  by  causes  and  shops  with  similar  items  in  previous 
weeks  and  months,  a  very  close  control  over  the  efficiency  of 
operation  will  be  secured. 

Production  and  Expense  Reports. — The  daily  statements  of 
productive  and  expense  wages  (Fig.  116)  and  machine  earnings 
(Fig.  115)  made  in  each  shop  are  also  summarized  weekly  on  a 


REPORTS  AND  RETURNS  FOR  SIEERI XTEX  hEXT      I-"* 

blank  similar  to  that  used  by  the  shop,  and  sent  to  the  super- 
intendent.    He  will  enter  the   weekly   figures   on    appropriate 

blanks,  similar  in  form,  but  columned  for  weekly  instead  of  daily 
totals,  so  that  a  comparison  is  set  up  for  each  shop,  covering  pro- 
duction (including  labor  and  bonus),  expense  in  one's  own  Bhop, 
expense  chargeable  to  other  shops,  and  total  of  productive  and 
expense  wages.  These  figures  signify  nothing  for  one  week, 
but  when  placed  side  by  side  with  a  series  of  previous  weeks  they 
give  a  good  rough  idea  whether  the  normal  proportion  between 
production  and  expense  is  being  maintained. 


Machine    Earnings                        Month    of                                         ]9 

Productive 
Department 

Stand.  Week 

W.E.    _ 

4  Wk  Average 

Hrs. 

Amt. 

Hrs. 

Amt. 

% 

Hrs. 

Amt. 

% 

Forge 

Milling  Dept. 

Machine  Shop   A 

_)]_ 

Machine  Shop    B 

• 

j(— 

Polishing  Shop 

=4 1 

Total  for  all  Depts 

3n 

Amount  Below  Standard 

\\ 

Fig.  127. — "Weekly  totals  and  monthly  average  of  machine  earnings. 


The  weekly  statement  of  machine  earnings  is  summarized  on 
another  comparative  blank  (Fig.  127),  which  records,  shop  by 
shop,  the  actual  and  the  standard  machine  earnings.  This  is  a 
very  important  return,  as  it  enables  the  superintendent  to  see 
how  far  machines  are  being  kept  at  work.  If  any  shop  seems  at 
fault,  reference  is  made  to  the  shop  record  of  machine  earnings 
(Fig.  115),  where  the  actual  daily  duty  of  each  machine  is 
recorded. 

Weekly  Balances  of  Work  in  Progress.— The  labor  value  of 
unfinished  work  in  the  different  shops  and  the  labor  value  of 
finished  jobs  not  yet  closed  out  into  finished  orders  are  figures 
that  give  a  good  idea  of  the  smoothness  or  congestion  obtaining 
in  the  plant.  Fig.  128  shows  the  weekly  balances  of  work  in 
each  shop,  as  posted  from  the  foreman's  daily  report  (Fig.  119), 
at  the  end  of  each  week.  Below  the  shop  totals  the  aggregate 
total  of  all  postings  to  Production  Order  master  schedules  still 


430      MA N I  F.  1  (  TURING  COSTS  AND  ACCOUNTS 

in  hand  is  entered.  The  grand  total  of  these  figures  shows  the 
labor  value  of  all  work  in  shops  and  also  of  all  finished  com- 
ponents. The  former  of  these  figures  is  checked  monthly  by- 
comparing  the  figures  for  each  shop  with  the  balance  of  labor  in 
Manufacturing  Journal,  and  the  latter  is  checked  by  comparing 
it  with  the  balance  for  labor  in  the  Finished  Department  Orders 
Journal.  The  value  of  the  return  is,  of  course,  the  facility  it 
affords  for  comparing  the  current  week's  performance  of  each 
shop  with  that  of  a  series  of  weeks.  By  this  means  a  very  close 
control  is  obtained  on  congestion  in  shops,  inasmuch  as  a  rise 


Labor   on    Uncompleted    Work            Month   of 19 

In 
Productive 

Departments 

W.E. 

W.E. 

W.E. 

W.E. 

4  Week  Av. 

Forge 

Hilling  Dept. 

Machine  Shop    A 

Machine  Shop   B 

Polishing  Shop 

Total  in  Shops 

On  Schedules 

Total  Unfinished 

Fig.  128. — Weekly  total  and  monthly  average  of  balances  of  work  in  hand 

(labor  only). 

in  these  figures,  if  unaccompanied  with  an  increase  of  the  pro- 
ductive pay-roll,  means  that  unfinished  work  is  piling  up  in  the 
shops.  Similarly,  an  increase  in  the  item  taken  from  the  master 
schedules  shows  thai  a  mass  of  finished  components  is  being 
accumulated  and  thai  their  transformation  into  assembled 
machines  is  falling  behind.  Though  the  return  does  not  show 
more  than  the  value  of  labor  concerned,  it  shows  this  every  week, 
throughout  all  productive  departments  and  thus  provides  a 
significanl  figure  relating  to  a  principal  factor  of  cost. 

The  Control  of  Expense.-  -In  the  previous  chapter  the  record 
of  expense  as  far  as  if  affects  the  foreman  was  dealt  with.  The 
superintendent  has,  of  course,  to  review  the  same  figures,  and  he 
also  has  to  control  the  economics  of  the  non-productive  depart- 


REPORTS  A  ND  RETl  h'XS  FOR  SI  7V-.7.7  \  77  \  l>i:\  I     43] 

merits,  such  as  the  power  plant,  the  repair  deparl  menl ,  I  be  Bt< 
and  any  others  that  minister  to  production  only  indirectly. 
Thus  in  some  big  plants  there  may  be  departments  for  fuel  oil, 
for  powdered  coal,  for  oxy-hydrogen  gas,  etc.  The  expenses  of 
these  have  not  only  to  be  watched,  but  their  outpul  has  to  be 
costed  and  then  allocated  to  the  productive  departments  in 
proper  proportion. 

The  power  plant  is  a  good  type  of  these  special  departments. 
The  returns  should  deal  with  it  as  a  separate  business.  Space 
does  not  permit  of  describing  a  comprehensive  power  report, 
but  in  a  plant  of  any  size  the  cost  should  be  expressed  as  a  rate 
per  horsepower-hour,  and  a  charge  made  to  each  shop  on  the 
basis  of  its  actual  consumption  of  power,  for  lighting,  for  crane 
work,  and  for  machinery.  Steam  for  heating  should  also  be 
made  the  subject  of  a  similar  charge.  All  such  items  are  col- 
lected through  Standing  Orders. 

The  control  of  expense  is  best  attained  by  the  "budget" 
method,  combined  with  a  rigorous  segregation  of  expense  items 
by  production  factors.  Each  such  item  is  represented  by  a 
Standing  Order  number  as  explained  in  Chap.  XII  (Part  II). 
In  the  course  of  determining  machine  rates  (see  Chap.  XX,  Part 
II)  a  careful  analysis  of  the  expected  expenditure  on  every 
Standing  Order  including  power  plant  and  auxiliary  departments 
will  have  been  carried  out,  and  this  should  be  made  the  basis  of 
a  weekly  comparative  Budget  Return,  showing  on  the  one  hand 
the  actual  expenses  incurred,  and  on  the  other,  their  comparison 
with  standard  or  expected  expense.  As  in  the  case  of  the  fore- 
man's control  of  jobs,  the  superintendent  need  concern  himself 
only  with  cases  in  which  the  standard  expense  has  been  unex- 
pectedly increased.  Diminished  expense  should  also  be  closely 
watched  by  the  clerk  compiling  the  return,  as  it  will  probably 
imply  an  error  somewhere,  unless  the  reason  is  already  known,  as 
a  reduction  of  staff,  a  strike,  etc. 

A  blank,  Fig.  129,  shows  how  the  weekly  return  of  expense  is 
entered.  The  figures  are  obtained  from  a  weekly  addition  of  the 
Standing  Order  Cost  Sheets,  and  when  the  total  for  the  month 
is  brought  out,  it  must  agree  exactly  with  the  same  items  as  en- 
tered on  the  Burden  Journal,  thus  checking  the  accuracy  of  the 
figures.  In  some  cases,  as  for  example,  non-engineering  plants, 
these  entries  could  be  taken  from  the  foreman's  daily  report  of 
Standing  Order  expense  (Fig.  116),  but  when  one  shop  does  work 


432      MANUFACTURING  COSTS  AND  ACCOUNTS 


Weekly  Return  and  Budget  of  Standing  Orders 

19 

Standing 
Order 

Number 

Item 

WE, 

)    Month 

Standard 

Actual 

>/ 

Actual 

v 

r 

' 

1 

' 

r 

| 

[ 

1 

r 

1 

/ 

t 

Grand  Total  all  Depts. 

In..    129. — Budget  of  Standing  Order  expense,  and  record  of  actual  expendi- 
ture by  weeks,  and  monthly  total. 
The  (</ )  column  is  checked  if  any  item  needs  superintendent's  scrutiny. 


REPORTS  AND  RETURNS  FOR  SUPERINTENDS  \  /      133 

for  another,  it  becomes  necessary  to  disl  ribute  the  charge  entered 
on  the  foreman's  return  as  chargeable  to  "other  shops,"  in  detail. 
In  such  cases  it  is  better  to  ignore  the  foreman's  return  and  take 
the  figures  direct  from  the  Cost  Sheets. 

Only  those  items  within  the  control  of  the  superintendent  are 
included  in  this  return.  Such  items  as  rents,  insurance,  Lnteresl . 
depreciation,  etc.,  are  not  included,  because  the  superintendent 
is  not  responsible  for  them,  and  they  are,  moreover,  invariable 
amounts  for  the  most  part,  not  reducible  by  anyone. 

Summary  of  Superintendent's  Information. — The  information 
provided  for  the  superintendent  will  now  be  seen  to  be  divided 
into  three  main  groups:  First,  daily  information  as  to  the  pr<  >i 
of  orders  is  furnished,  leading  to  a  complete  schedule  of  weights 
and  costs  of  each  component  of  an  order  and  to  a  summary  of  the 
cost  of  the  entire  order,  together  with  the  subsidiary  expense  for 
patterns,  special  tools  and  jigs,  and  spoiled  work,  which  latter 
items  may  or  may  not  be  ultimately  chargeable  to  the  order  itself. 
Secondly,  information  is  supplied  as  to  certain  kinds  of  shop  or 
department  efficiencies,  namely,  the  average  loss  due  to  idle  I 
spoiled  work,  and  exceptional  jobs,  shop  by  shop.  The  balances  of 
work  in  hand  at  the  end  of  each  week  in  each  shop,  and  in  the 
shape  of  finished  parts  and  material,  are  also  provided,  and  can 
be  compared  with  the  total  of  finished  orders,  and  of  orders  re- 
ceived. Thirdly,  a  current  comparison  of  actual  expense,  classi- 
fied by  production  factors,  is  maintained,  comparable  with  the 
budgeted  or  expected  figures  for  such  expense.  This  enables  the 
superintendent  to  observe,  at  once,  any  increase  in  expense  items 
in  any  part  of  the  plant,  and  if  illegitimate,  to  curb  it  before  it 
assumes  either  large  or  permanent  form. 


28 


CHAPTER  IV 
REPORTS  AND  RETURNS  FOR  THE  EXECUTIVE 

The  ordinary  Profit  and  Loss  accounts  and  Balance  Sheet  are 
derived  from  mercantile  practice,  and  are  much  older  than  mod- 
ern manufacturing.  For  this  reason  they  do  not  commonly  pre- 
sent the  facts  in  a  strictly  logical  order,  having  reference  to  the 
actual  occurrences  which  have  taken  place  in  a  plant  during  a 
given  period.  For  the  executive's  use  we  require  to  serve  this 
information  in  a  series  of  groups,  each  of  which  corresponds  to 
the  practical  distinctions  between  purchasing,  production,  sell- 
ing, credit,  and  cash.  A  short  discussion  as  to  these  natural 
groupings  will  be  of  service. 

The  operations  of  a  plant  have  four  main  features — money  has 
been  expended — part  of  the  purchases  have  been  expended  on 
production  and  part  remain  on  hand.  Secondly,  the  portion  ex- 
pended has  gone  into  the  factory  and  product  (finished  and  partly 
finished)  is  a  result.  These  are  two  clearly  defined  groups. 
Next,  a  certain  portion  of  this  product  has  been  sold,  by  the  aid 
of  additional  expenditure  for  salesmen,  advertising,  etc.,  and 
from  such  sales  a  profit  has  resulted.  This  is  also  a  clearly 
defined  group.  If  all  transactions  were  for  cash,  these  two  groups 
would  only  need  to  be  supplemented  by  an  account  of  cash 
received,  expended  and  on  hand  to  complete  the  story  of  the 
period.  Actually,  however,  we  extend  credit  to  our  customers, 
and  the  status  of  this  credit — whether  our  outstandings  are  in- 
creasing or  diminishing — must  also  be  recorded.  Frequently  we 
take  credit  ourselves,  and  if  so,  the  amount  of  our  liabilities  must 
be  recorded.  These  transactions  form  a  fourth  clearly  defined 
group.  Finally,  our  disbursements  and  collections  must  be 
tabulated  so  that  the  amount  of  cash  we  possess  is  known.  This 
i-  the  fifth  and  final  group  in  which  we  are  interested. 

1'  will  be  seen  thai  as  regards  each  of  these  groups  the  execu- 
tive askfi  the  same  series  of  questions,  namely:  What  went  in? 
Whal  '•;unc  ou1  ?     What  is  left  in,  and  in  what  form  is  it  left? 

In  all  these  groups  there  are  not  only  ingoings  and  outgoings, 

434 


REPORTS  AND  RETURNS  FOR  EXECl  77  1  /        135 

but  there  is  also  a  remainder  or  balance  of  something.  In  the 
first  two  groups  we  have  balances  of  unused  material  and  of  work 
in  process.     In  the  third  group  we  have,  in  most  a  balance 

of  goods  unsold.  In  the  fourth  group  we  have  a  balance  of  collect- 
ible accounts,  and  perhaps  of  accounts  payable  by  ourselves 
when  we  can  spare  the  money  to  do  so.  In  the  fifth  group  we 
have  the  balance  of  cash  in  the  safe  or  at  the  bank. 

Though  all  these  transactions  and  their  resulting  balances  can 
be  read  in  an  ordinary  mercantile  Profit  and  Loss  and  Balance 
Sheet,  their  essential  independence  is  not  brought  out  clearly. 
The  fact  that  they  are  all  entirely  separate  groups  of  1  ransacl  ions, 
however,  is  most  important  to  emphasize,  if  the  executive  is  to 
form  a  clear  mental  picture  of  the  result  of  the  operations  of  the 
period.  Further,  it  assists  to  a  clear  grasp  of  the  situation  if 
certain  groups  of  transactions,  such  as,  for  example,  those  relal  ing 
to  stores,  to  factory  burden  and  to  selling  expenses,  are  presented 
separately,  so  that  their  individual  movements  can  be  seen  more 
distinctly  and  the  main  story  more  easily  read  by  their  separal  ion 
from  it. 

There  is  also  the  important  consideration,  in  many  plants,  t  bat 
several  different  lines  of  product  are  made,  and  we  may  desire  to 
ascertain  just  how  we  stand  with  regard  to  each  of  them.  The 
latter  information  rarely  if  ever  reaches  the  final  Profit  and  Bal- 
ance Sheets  which  go  to  the  shareholders  of  a  corporation;  but 
it  is  of  prime  importance  to  the  executive. 

If  we  imagine  an  executive  who  has  just  taken  charge  of  a 
business  and  wants  to  be  put  into  possession  of  its  salient  features, 
we  shall  have  a  viewpoint  that  lends  itself  to  demonstration. 
But  though  the  first  thought  of  such  an  executive  would  be 
directed  to  the  month's  trading  results — the  profit  that  had  been 
made — his  second  thought  would  be  for  the  general  position  of 
the  business  as  regards  production;  and  as  profits  logically  arise 
from  production,  and  not  vice  versa,  we  shall  develop  the  series  of 
reports  presented  to  him  from  the  viewpoint  of  the  factory  first. 

Reports  on  Expenditure. — Preliminary  to  the  actual  story  of 
production  will  come  the  reports  on  the  expenditure  that  makes 
production  possible.  First,  there  will  be  provided  a  summary  of 
wages  paid,  showing  its  distribution  to  factory  burden,  produc- 
tion and  equipment  (that  is,  to  additions  to  equipment  values, 
which  in  many  shops  are  a  regular  feature  of  each  month's  work) 
and  to  selling.     Next  in  order  is  a  summary  of  stores,  showing 


436     MANUFACTURING  COSTS  AND  ACCOUNTS 

purchases,  issues  to  burden,  production,  or  equipment,  and  bal- 
ance of  stores  left  on  hand. 

Burden  Reports. — The  next  step  is  to  present  the  various  items 
of  expenditure  that  go  into  burden,  both  factory  and  sales,  and 
this  is  presented  in  two  divisions,  namely,  factory  burden  and 
sales  burden,  or  as  it  is  usually  called  "selling  expenses."  Con- 
sideration of  the  latter  is  postponed  until  the  whole  question  of 
production  has  been  disposed  of. 

Production  Reports. — The  main  story  of  production  is  now 
ready  to  be  told.  The  wages,  stores  and  burden  that  have  gone 
into  product  are  set  against  the  cost  of  the  finished  product, 
arranged  in  classes,  that  has  been  delivered  to  the  selling  depart- 
ment. The  burden  which  has  not  been  taken  up  by  machine 
rates  is  reduced  to  a  supplementary  rate  and,  being  distributed 
over  productive  wrork  done  in  the  factory,  appears  as  part  of  cost 
of  finished  product,  and  the  balance  represents  work  unfinished 
and  still  in  the  factory,  thus  showing,  as  in  the  other  cases,  what 
has  gone  in,  what  has  come  out  and  what  still  remains  in. 

A  similar  return  is  made  for  additions  to  equipment,  buildings 
and  to  other  capital  accounts.  The  wages,  stores  and  machine 
rates  that  have  gone  to  the  production  of  new  equipment  items 
are  placed  on  one  side  of  the  account  and  the  cost  of  finished 
items  on  the  other.  The  balance  left  is  the  value  locked  up  in 
unfinished  additions  to  equipment  still  in  the  shops. 

The  equipment  itself  is  then  similarly  reported  on.  Finished 
additions  from  the  foregoing  report  appear  on  one  side.  Depre- 
ciation written  off  into  burden  appear  on  the  other,  and  the 
balance  represents  the  present  value  of  equipment,  buildings  and 
other  capital  items. 

This  finishes  the  story  of  production.  It  has  been  told  step  by 
step,  from  the  separate  statements  of  what  has  gone  in  to  the 
statement  of  what  has  come  out  in  the  form  of  finished  goods  and 
of  additions  to  plant.  Also  the  balances  of  stores,  of  work  in 
shops  on  orders,  and  of  work  in  shops  on  additions  to  equipment 
are  clearly  set  out.  Finished  additions  to  equipment  are  also 
shown  in  their  relation  to  capital  accounts. 

Dealing  with  Finished  Goods. — We  have  now  to  deal  with 
finished  goods  and  their  sale,  and,  of  course,  also  with  the  selling 
expense.  If  we  have,  say,  three  lines  of  product,  each  of  these  is 
reported  on  separately  from  this  stage  onward.  In  most  cases 
finished  goods  will  not  be  sold  straight  from  the  factory  to  the 


REPORTS  AN  J)  RFTCRXS  FOR  FXFa  l  7/1  /       437 

consumer,  but  will  be  kept  in  stock  ready  for  delivery.  This 
necessitates  intermediate  reports,  to  keep  track  of  the  balance  ol 
goods  on  hand.  Otherwise  finished  goods  from  the  production 
report  and  selling  expense  from  the  sales-burden  reporl  would  go 
direct  to  the  trading  report.  In  the  present  instance,  to  simplify 
explanation,  we  shall  assume  that  this  is  so,  and  that  all  produc- 
tion is  on  customer's  order  and  goes  direct  from  the  factory  to 
the  customer. 

A  separate  trading  report  is  provided  for  each  line  of  product. 
The  ingoings  are  finished  goods  and  selling  expense.  On  the 
other  side  is  sale  price,  the  balance  between  each  being  profit  on 
that  line  of  goods. 

The  goods  having  now  been  sold  and  the  profit  ascertained,  we 
have  to  consider  the  question  of  collecting  what  is  due  to  us.  For 
this  purpose  a  ledger-balances  report  is  provided.  On  one  side  is 
placed  sales  for  the  month  and  balance  brought  forward  from  last 
month,  graded  into  three  classes,  namely,  accounts  due,  not  due 
and  overdue.  On  the  other  side  is  placed  the  amount  actually 
collected  during  the  month,  also  the  discounts  allowed,  and  the 
balance  is  accounts  outstanding,  graded,  as  before,  into  due,  not 
due  and  overdue. 

Where  we  do  not  pay  prompt  cash  for  purchases  a  similar 
report  is  made  for  accounts  owing  by  us.  This  shows  the  amount. 
of  our  liability  outstanding  at  the  end  of  the  month. 

Finally,  the  disposal  of  the  cash  so  collected  is  reported  on. 
Cash  received  is  set  on  one  side,  cash  paid  on  the  other,  and  the 
balance  is  cash  on  hand  in  safe  or  bank. 

This  general  scheme  is  applicable  to  any  manufacturing  busi- 
ness, subject  to  extension  in  a  few  cases  to  cover  special  circum- 
stances. It  will  have  been  seen  that  it  covers  all  the  operations 
of  the  plant  in  distinct  stages.  In  regard  to  each  stage  the  three 
questions  stated  previously  have  been  asked  and  answered. 
Certain  of  the  reports,  such  as  administrative  expense,  serve  to 
show  the  collection  of  items  and  the  distribution  of  their  total  to 
other  reports.  Others  contain  balances.  If  all  is  correctly 
stated,  these  balances  when  brought  together,  and  the  capital 
stock  of  the  business  added,  will  balance.  In  other  words,  they 
are  verified  by  a  Balance  Sheet  of  the  usual  kind.  Having  thus 
outlined  the  system  of  reports,  and  explained  the  scope  of  cadi. 
some  specimen  blanks  will  be  shown.  It  may  be  pointed  out  here 
that  an  important  feature  of  the  control  that  such  reports  give  is 


438      MANUFACTl  RING  COSTS  AND  ACCOUN TS 


ITEMS 


JAN TAB Y 


Budget      Actual 


TOTAL  FOR  TEAR 


Budget      Actual 


WAGES   &   SALARIES 


Fig.  130 


Salaries,  General 


Salaries,  Factory 


Factory  Wages 


Total  In 


To  Production 


To  Plant  Addition 


To  Standing  Orders 


To  Selling  Expense 


Total  Out 


STORES 


Balance  from  Last  Month 


Purchased  this  Month 


Total  In 


To  Production 


To  Plant  Addition 


To  Standing  Orders 


To  Selling  Expense 


BALANCE   FORWARD 


Total  Out 


Fig:.  131 


WORKS  EXPENSE 


Fig.  132 


Balance  from  Last  Month 


Purchases  this  Month 


Total  In 


To  Production 


To  Plant  Addition 


To  Standing  Orders 


BALANCE   FOKWAKU 


Total  Out 


Fias.    130,  131   and  L32,      Budgel  and  actual  expenditure  on  wages,  stores, 
and  works  expense. 


REPORTS  AND  RETURNS  FOR  EXECUTH  E      l.;-.. 

their  arrangement  in  such  shape  thai  each  month  can  be  ruin- 
pared  with  previous  months,  with  regard  to  cadi  item  appearing 
on  the  reports. 

More  than  this  is  also  possible.  In  a  business  of  an  established 
character  we  can,  by  using  alternate  columns  on  the  blank  for 
that  purpose,  forecast  the  expected  value  of  each  item;  or.  in 
other  words,  we  can  budget  all  the  information,  thus  setting  up  a 
standard,  variations  from  which  may  be  cause  for  inquiry.  In 
some  businesses  the  value  of  budgeting  is  considerable,  and  in 
every  case  it  fosters  the  habit  of  looking  ahead. 

Wages,  Stores,  etc.,  Reports. — The  wages  report  (Fig.  130) 
explains  itself.  As  wages  are  necessarily  spent,  and  cannot  be 
stored,  there  is  no  balance  in  this  report.  Wages  are  all  distrib- 
uted to  one  or  other  of  the  later  reports. 

We  begin  with  a  balance  of  stores  in  hand  (Fig.  131).  To  these 
is  added  the  value  of  purchases  during  the  month.  Against  this 
total  is  placed  the  issues  of  stores,  and  also  any  purchases  that 
may  have  been  sent  back  to  the  supplier.  The  amounts  entered 
as  issues  are  distributed  to  one  or  other  of  the  following  reports. 
But  in  this  case  there  is  left  a  balance,  namely,  of  materials  still 
in  stores  and  not  yet  issued.  This  is  carried  forward  to  next 
month.  If  desired,  this  report  can  be  made  more  detailed  by 
division  into  classes  of  stores,  such  as  brass,  steel,  or  castings,  wire, 
etc.  The  balance  in  this  report  must  be  agreed  each  month  with 
the  balance  in  the  Stores  account. 

Certain  items  chargeable  as  works  expense  (see  Chap.  X. 
Part  II)  are  also  reported  by  means  of  Fig.  132.  It  may  happen 
that  part  of  this  is  held  over  to  equalize  distribution  bet  ween 
months,  so  that  there  will  sometimes  be  a  balance  to  lie  provided 
for. 

Factory-burden  Report. — The  executive  is  probably  not  inter- 
ested in  the  technical  details  of  burden  expenditure,  which,  are 
matters  for  the  superintendent.  The  factory-burden  report 
(Fig.  133),  therefore,  gives  him  merely  the  total  chargeable  to  the 
factory,  and  against  this  the  amount  actually  charged.  The 
balance  "held  over"  represents  the  equalization  of  expense,  such 
as  the  holding  over  of  part  of  the  cost  of  heavy  repairs.  This  is 
the  really  significant  figure  of  the  report.  It  keeps  uncharged 
expense  prominently  in  view. 

Production  Report. — The  production  report  (Fig.  134)  brings 
forward  the  balance  of  work  in  hand  at  the  beginning  of  month. 


440      MANUFACTURING  COSTS  AND  ACCOUNTS 


Items 

January 

Total  For  Year 

Budget    1    Actual 

Budget  |   Actual 

FACTORY    BURDEN            (              FIG.  133 

Balance  Foreman 

\  \ 

Wages  &  Salaries  on  Standg.  Orders 

\  ; 

Ditto 

1 

Works  Expense  Ditto 

/  i 

Depreciation    Factory- 

{ 

Rents,  Insurance  etc.  Factory 

( ! 

Interest,  Factory 

i  j 

Total  In 

Distributed  as  Machine  Rates 

Distributed  as  Supp.  Rates 

( 

Balance  held  Over 

Total  Out 

■ 

i 

PRODUCTION                1 

FIG.  134 

Balance  (Work  in  Hand)      Fwd. 

Productive  Wages,  this  Month 

Productive  Material,  this  Month 

/ 

Productive  Works. Expense  this  Mo 

ith 

I 

Burden  as  Machine  Rates    Ditto 

) 

Burden  as  Supp.  Rate     Ditto 

Total  In 

Finished  Product         Class   A 

"                  "             Class  B 

)  ( 

"            Class   C 

\  1 

Machine  Rates  on  PI.  Addns.  ifc 

Balamce    (  Wk.  In  Hd.) 

Total  Out 

I 

:•:  This  Item  is  Transferred  to  Plant  Addition              \ 
Budget  Report                                                                ( 

1  [G      133   and    ]:;!       Budgets  and  actual  expenditure  on  factory  burden 

and  production. 


REPORTS  AND  RETURNS  FOR.  EX E(  l  77  1  /        !  1 1 

adds  to  it  the  wages,  stores  and  burden  from  previous  reports 
expended  during  the  month,  and  against  the  total  of  these  two 
items  places  the  work  finished  during  the  month,  leaving  a  bal- 
ance of  work  unfinished  to  go  forward.  The  finished  work  is 
classified  by  products,  such  as  superheaters,  steam  fittings,  con- 
densers, or  whatever  kinds  there  may  be.  A  credit  i~  also  made 
here  for  machine  earnings  expended  on  additions  to  equipment. 


Fig.  135. — Budget  and  monthly  returns  of  burden  unabsorbed  by  m^hine 
rates  and  distributed  as  supplementary  rate. 

This  is  usually  a  small  item,  and  appears  here  to  avoid  complexity 
in  the  accounts.  As  shown,  the  balances  of  work  in  hand  are  not 
divided  into  classes  of  product,  but  this  could  be  done  without 
much  extra  work  if  desired.  This  report  is  a  very  important 
one,  especially  if  we  consider  that  the  vertical  columns  repr'>mt 
months.  The  monthly  variations  in  the  principal  facts  of  pro- 
duction are,  therefore,  disclosed  by  this  report,  which  lends  itself 
particularly  to  the  budgeting  method  as  already  explained. 
Burden  charged  to  the  shops  and  not  absorbed  by  machine 


442      MANUFACTURING  COSTS  AND  ACCOUNTS 

rates  represents,  of  course,  wasted  opportunities.  If  all  tne 
machines  had  been  working  to  the  full  there  would  have  been 
none  unabsorbed.  In  order  to  get  rid  of  it,  one  of  two  plans  may 
be  followed:  It  may  be  charged  off  at  once  to  Profit  and  Loss, 
since  it  is  simply  waste  and  does  not  really  represent  the  cost  of 
anything  made.  But  a  safer  way  is  to  prorate  it  over  the  work 
that  has  been  done.  It  increases  the  cost  of  this,  and  so  reaches 
Profit  and  Loss  account  after  all.  The  unabsorbed-burden  report 
(  Fig.  135)  keeps  in  view,  month  by  month,  its  amount,  and  the 
per  cent,  rate  that  has  been  found  necessary  to  get  rid  of  it  by 
prorating.  Each  month's  waste  is  not  prorated  over  that  month's 
finished  work.  That  would  produce  too  violent  fluctuations. 
The  balance  of  all  work  done  in  the  shop  during  the  month, 
including  the  finished  work,  is  taken  into  account.  Thus,  work 
in  hand  always  includes  a  percentage  of  supplementary  rate. 
This  unabsorbed  burden  must  not  be  confused  with  the  'Tield- 
over"  burden  in  Fig.  133.  The  latter  has  already  been  explained. 
The  significant  figure  in  this  report  is  the  percentage  of  supple- 
mentary rate.  It  is  an  index  to  the  degree  in  which  the  machin- 
ery of  the  plant  is  being  kept  at  work.  In  slack  times,  of  course, 
it  tends  to  rise. 

Equipment  Report. — The  additions  to  equipment  report  (Fig. 
136)  is  practically  a  production  report  confined  to  plant  addi- 
tions. It  is  not  included  in  the  production  report — first,  because 
it  is  a  class  of  activity  that  merits  being  veiwed  separately,  and, 
secondly,  because  it  does  not  take  a  supplementary  rate.  It 
would  be  quite  illegitimate  to  charge  plant  additions  with  un- 
absorbed burden  due  to  idle  machines.  In  fact,  it  would  be 
absurd  to  do  so,  since  that  would  mean  that  such  work  would 
cost  more  in  slack  times  than  in  busy  times.  Yet  it  is  in  slack 
times  that  as  much  of  this  kind  of  work  as  possible  should  be 
put  in  hand.  All  equipment  is  shown  in  one  item  in  the  equip- 
menl  report  (Fig.  136A).  Subdivision  into  buildings,  mach- 
inery, tools,  etc.,  would  be  desirable  in  most  cases.  The 
gem  ral  idea  would  remain  the  same,  namely,  to  provide  a  means 
of  Bhowing  the  present  value  of  the  equipment  from  month  to 
month,  after  new  finished  additions  have  been  charged  up  and 
depreciation  taken  off. 

Selling  Department  Reports. — The  distribution  of  sales-burden 
n-port  (Fig.  L37)  collects  all  the  items  of  selling  expense  and  shows 
its  allocation  1  >e1  ween  the  various  classes  of  products.     This  being 


REPORTS  AND  RETURNS  FOR  EXECX  TIVE      143 


determined,  the  amount  chargeable  is  shown  separately  for  each 
product  or  an  individual  product  sales  burden  report  (Fig.  137a). 
This  allows  a  proper  amount  of  the  sales  burden  againsl  each 
line  of  product  to  be  charged  to  the  current  month,  and  also  allows 
some  portion  of  it  to  be  held  up,  as,  for  instance,  when  heavy 
expense  for  a  particular  campaign  has  just  been  incurred.  Jf  so 
held  up,  it  must  of,  course,  be  carried  forward  to  the  next  mouth. 


PLANT  &c  ADDITIONS 


FIG.  13G 


Items 


Balance  from  Last  Month 


Wages  this  Month 


Stores  this  Month 


Mach,Rates    (from  Fig  134) 


Works  Expense  Items 


Total  In 


Additions  Finished  this  Month 


Unfinished  Work  Forward 


Total  Out 


JANUARY 


Budget        Actual 


TOTAL  Foil  YKAR 


Budget 


Actual 


PLANT    REPORT 


FIG.  136  A 


Balance  Last  Month 


Additions  Finished  as  Above 


Purchased  this  Month 


Total  In 


Depreciation  this  Month 


Equipment  Sold 


BALANCE  FORWARD 


Total  Out 


Figs.   136  and  136A. — Budget  and  actual  expenditure  on  plant  and 

equipment. 

The  basis  of  distributing  expense  to  the  various  classes  of  product 
is  not  disclosed  by  the  report  (Fig.  137).  It  must  be  decided  on 
after  careful  consideration  of  all  the  facts.  Once  this  basis  is 
fixed  the  allocation  of  the  different  items  of  selling  expense  to  the 
different  products  is  a  routine  matter,  so  that  all  that  is  needed 
here  is  a  statement  of  the  fact  that  they  have  been  so  allocated. 
The  "held-up"  balance  is  the  most  significant  figure  of  the  Fig. 
137a  report. 


444      MANUFACTURING  COSTS  AND  ACCOUNTS 


I  !'•-.  137  '.m>  l37o. — Distribution  of  selling  harden  to  products,  and 
individual  statements  of  amounts  charged  and  carried  forward  respectively 
in  regard  to  each  separate  product. 


REPORTS  AND  RETURNS  FOR  EXECUTU  E      145 

Trading  Reports. — A  trading  report  (Fig.  138)  is  made  for  each 
class  of  product.  Also  a  summary,  consolidating  all  the  separate 
product  reports  in  one  set  of  figures,  is  desirable  it'  there  arc  more 
than  two  products.  The  factory  cost  of  the  finished  product  for 
the  month  (including  its  proportion  of  supplementary  rate)  is 
added  to  the  selling  expense  for  that  class  of  product  for  the 
month.  Against  these  items  is  placed  the  price  of  the  goods  as 
billed,  the  difference  or  balance  being  the  profit  on  that  class  of 
product. 


TRADING  REPORTS                               FIG.  138 

Items 

JANUARY 

TOTAL  FOR  YEAR 

Budget  1  Actual 

Budget         Actuul 

ALL  PRODUCTS  TOGETHER       ) 

Faotory  Cost  of  Sales 

Selling  Burden  this  Month 

BALANCE  PROFIT 

Total 

Sale  Price  of  Sales 

PRODUCT    A                             \\ 

Factory  Cost  of  Sales  of  A 

Selling  Burden  on  A  this  Month 

BALANCE  PROFIT 

Total 

Sale  Price  of  Sales  of  A 

PRODUCT  B 

Factory  Cost  of  Sales  of  A 

Fig.  138. — Trading  budget  and  actual  returns  on  all  classes  of  product 
together  and  each  individual  product  separately. 

Collectible  Accounts. — The  collectible-accounts  repori  (Fig. 
139)  shows  the  status  of  credit.  It  collects  the  total  collectible 
and  deducts  the  amounts  collected  and  the  discounts,  leaving  the 
amount  still  outstanding  at  the  month  end,  classified  into  ac- 
counts due,  not  yet  due  and  overdue. 

Products  for  Own  Use. — Where  a  firm  makes  subsidiary  lines 
for  its  own  use,  such  as  nuts,  bolts,  screws,  etc.,  which  arc  trans- 
ferred to  stores  on  completion,  a  report  like  Fig.  136  should  be 


446      MANUFACTURING  COSTS  AND  ACCOUNTS 


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REPORTS  AND  RETURNS  FOR  EXEi  I  7/1  /       447 

used,  and  such  work  separated  from  ordinary  production.  The 
reason  is  that  such  work  does  not  take  supplementary  rate.  To 
charge  it  with  such  rate  means  thai  the  cosl  of  making  things  for 
oneself  is  higher  in  slack  times  than  in  busy  limes,  which  is 
obviously  untrue.  This  is  one  of  the  absurdities  thai  have  been 
promoted  by  the  usual  percentage  burden  systems,  and  many 
firms  have  lost  and  are  losing  money  because  they  suppose  that 
work  for  themselves  is  costing  them  much  more  than  it  really  is. 
The  real  truth  of  the  situation  is  that  in  slack  times  they  are 
losing  less  by  such  work  than  would  he  the  rase  if  they  purch 
outside,  since  such  work  absorbs  machine  rates  which  would 
otherwise  go  into  unabsorbed  burden  and  be  wasted. 

Nothing  has  been  said  as  to  the  cash  report,  nor  as  to  the  ordi- 
nary Profit  and  Loss  accounts  and  Balance  Sheet,  which  will  he 
familiar  to  everyone.  But  the  method  of  carrying  the  items  in 
vertical  columns  month  by  month  should  be  extended  to  the  ex- 
ecutive's copies  of  these  documents  (sec  Chap.  XII,  Part  I). 


INDEX 


Accounting   and   bookkeeping   con- 
trasted, 19 

by  business  periods,   109 

cost,  123 

mechanism  of,  12 
Accounts,  nominal,  18 

real,  13 
Administrative  expenses,  34,  235 
Advertising  account,  31,  36 
Allocating,  definition,  16 
Auxiliary  equipment,  96,  193,  387 


B 


Balance  sheet,  16,  21,  24,  115 
Bids,  140 

Bill  of  material,  268,  380 
Bonuses,  129,  229,  230,  327 
Bookkeeping   and    accounting   con- 
trasted, 19 

elements  of,  12 
Books  of  original  entry,  13,  21,  29 
Budget,  403,  431 
Buildings  account,  30,  34,  191 
Burden,  243,  272,  322,  346 

class,  389 

hourly,  312 

journal,  59,  239,  280,  297,  330 

normal,  338 

report,  439 

tonnage,  339 
Byproducts,  93 


C 


Capital  investment,  3,  27 
Cash  journal,  29,  146,  150 
Catalogues,  account,  31,  36 

trade,  141 
Class  burden,  389 
Clock  system,  219 
Closing  journal,  22 
Component  orders,  257,  263,  318,  379 


Continuous  inventory,  158,  183 

Cost  accounting,  123 

for  product,  6,  9,  37 
mechanism  of,  25 
Cost  album,  423 

including  interest  in,  392 
of  marketing,  9 

sheets,  272,  273,  275,  319,  342, 
378,  381,  412 
Costing,  279 

contrasted  with  purchasing.  I 
department   hour-cost   method, 

287 
methods,  44,  56,  66,  287,  312, 

340,  355,  371 
on  machine  rate  plan,  340,  355 
percentage  plan,  56,  312 
Costs,  departmental,   38,    287,   355, 

377 
Crane  area,  361 

Creditor's    ledger    control    account, 
149 


I) 


Departmental  cost  methods,  38,  287, 
355 

costs,  collecting,  377 

efficiency,  402 

manufacturing  journal,  308,  334, 
384 

orders,  258 
Departments,  definition,  284 

productive,  285 
Depreciation  journal,  34 

of  equipment,   4,   26,   27,    191, 
367,  390 

schedule,  202 
Designs,  accounting,  96 
Direct  labor,  41,  44,  56,  59,  118 

material,  40,  48,  59,  118 
Distribution  schedule,  213 
Double-entry  bookkeeping,  13 


449 


150 


INDEX 


E 


Efficiency  of  departments,  402 

of  shop,  report,  426 

record  of  workmen,  400 
Equipment,  account,  30,  34 

auxiliary,  90,  193,  387 

depreciation,  4,  26,  27,  191,  367, 
390 

purchase  of,  3 

report,  442 
Executive,  reports  for,  403,  434 
Expense  accounting,  56,  59 

control  of,  430 

connecting  with  product,  41,  44, 
118 

journal  fur  .sales,  107 


Factory  cost,  33 

reports  and  returns,  395 
Finished  goods  journal,  382 

work  journal,  49 
Foreman,  reports  for,  398,  405 

G 

Gate  time  record,  220 
Goods  received  book,  170 

H 

Hand  industries,  315 
Hourly  burden,  312 
machine  rate,  368 


1 


I. lie  machines,  71,  349,  351,  398 
Individual  machine  factor,  367 
Insurance,  account,  30,  207 
Interest,  including  in  cost,  :;'.»_' 
Inventory,  continuous,  158,  183 

ISSUe  price  register,   171,  175 

Item  cards,  L60 


Tigs,  accounting,  96 


Journals,   13,  29 


Labor,  cost  of,  3 

direct,  41,  44,  56,  59,  118 
Land  schedule,  359 
Ledger  accounts,  13 
Lighting,  358 
Lots,  costing  by,  54 

M 

Machine  earnings,  429 

rate,  costing,  340,  355,  371 
hourly,  368 

time,  reports,  409 
Machines,  idle,  71,  349,  351,  398 

rented,  78 
Manufacturing  accounts,  1 

recording  purchases,  146 

journal,  281 
Marketing  the  product,  cost  of,  9 
Master  schedule,  422 
Material,  account,  30,  34 

bill  of,  268,  380 

cost  of  changes,  2 

costing,  379 

direct,  40,  48,  59,  118 

distribution  in  costing,  292,  323 

journal,  309 
Mechanism  of  accounting,  12,  25 
Molds,  accounting,  96 
Munroe  machine,  372 

N 

Nominal  accounts,  18 
Normal  burden,  338 

O 

<  >l>solescence,  192 

<  >rder  register,  310 

system  of  costing,  342 
Orders,  238,  242 

accounting,  54,  57,  81 
component,  257,  263,  318,  379 
control  by  superintendent,  401 


I.\  DEX 


151 


Orders,  departmental,  258 

plant  addition,  270,  380,  385 
production,  255,  290,  30).  318, 

344,  380,  391 
purchase,  132,  139 
replacement,  90,  391,  428 
standing,  245,    290,    29G,    317, 
342 
Organization  factor,  366 


Part  orders,  257 

Patterns,  accounting,  96 

Pay-roll,  217,  295 

Percentage  plan  of  costing,  56,  312 

Perpetual  inventory,  158,  183 

Piecework,  129,  229,  327 

Plant  account,  30,  191 

addition  order,  270,  380,  385 

cost  sheets,  273,  275 
Postage  account,  18 
Power,  accounting,  67,  359,  373 

house,  expense  of,  26 
Premiums,  129,  231,  327 
Process  hour,  50 

work,  time  record  of,  305 
Production,  accounting,  37,  123 

centers,  313 

cost  of,  5 

cost  sheets,  273,  275 

factors,  68,  76,  248,  355 

orders,  255,  290,  304,  318,  344, 
380,  391 

report,  436,  439 
Productive  departments,  285 
Profit  and  loss  account,  404 

ascertaining,  102 
Profits,  113 

Property  accounts,  110 
Purchase,  118 

definition  of,  1 

journal,  29,  146 

orders,  132,  139 

requisitions,  137 

specifications  for,  132 
Purchases,  division  of,  3 
Purchasing,  contrasted  with  costing, 
4 


Purchasing,  rust  of,  :•; 

recording  expenditures,  l  16 


i: 


Kami  index,  L75,  22  1 

Rr:il  accounts,  L3 

Reject,  93 

K«'iit  account,  18,  30,  34 
cost  of,  3 

Renting  machines,  78 

Rents,  207 

Repairs,  373 

Replacement  order,  90,  391,   128 

Reports,  130 
factory,  395 
for  executive,  403,  434 
for  foreman,  398,  405 
for  superintendent,  400,  418 
of  expenditure,   135 
of  selling  department.   I  12 
on  burden,  436 
on  equipment,  1 1- 
on  factory  burden,  439 
on  finished  goods,  436 
on  production,  436,  439 
on  shop  efficiency,  426 
on  stores,  439 
on  wages,  439 
trading,  445 

Requisitions  for  purchases,  137 
for  stores,  173 

Reserve  account,  211 

Returns,  factory,  395 


Salaries,  account,  Ml,  34,  40,  216, 

book,  232 
Sales,  100 

expense,  33,  36 

journal,  21 
Scrap,  87 

by  product,  91 
Selling  department,  10 

expense,  100,  240 

reports,  442 
Service  cost  sheets,  -7'A 

costing,  288 


452 


INDEX 


Service  expense,  399,  401 

purchase  of,  207 

special,  orders,  245 
Shop  efficiency  reports,  426 
Shrinkage,  91 
Sold  ledger,  25 
Space  factor,  costing,  357 
Special  service  orders,  245 
Specifications  for  purchases,  132 
Spoilage,  86,  311,  391,  399,  415 
Standardization  of  charges  to  prod-> 
uct,  70 

of  materials,  134 
Standing  order  cost  sheets,  275,  296 

orders,  245,  290,  296,  317,  342 
Stationery  account,  18,  31,  34 
Stock-taking,  8 
Stores  and  storckeeping,  156,  167 

issues  journal,  34,  177,  292 

report,  439 

requisition  for,  173 

transport  factor,  361 
Summarizing  accounts,  109 
Sundry  expenses,  34 
Superintendent,  reports  for,  400,  418 
Supervision  factor,  364 
Supplementary  rate,  347 
Supplies,  account,  30,  34 
Surplus  in  balancing  accounts,  115 
Suspended  expense,  19,  211 


Taxes,  account,  30,  207 
Time,  accounting,  216 
cards,  223 


Time,  machine,  409 

record  of  process  work,  304 

recording,  50 

reports  for  foreman,  406 

sheets,  295,  324 
Tonnage  burden,  339 
Total,  monthly,  320 
Trade  catalogues,  141 
Trading  account,  22 

reports,  445 
Traveling  account,  18,  31,  36 

U 
Unit  quantity  of  product,  42 

V 
Voucher  register,  150 

W 

Wages,  account,  31,  34,  36,  40,  44, 
216 
distribution  in  costing,  293,  323, 

346 
rate  register,  224 
record  of,  411 
report  on,  439 
Waste,  86 
Wasted  machine  capacity,  71,  349, 

351,  398 
Workman's    efficiency    record,    400, 

416 
Works  expense,  234 
order,  257 


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